(About 3/4 of the length of this entry is composed of excerpts from the book, all confined to the bottom of the post. Sometimes very long posts deter readers from starting. So feel free to consider the line 1/4 of the way down the page the "end", with the excerpts below that line being footnotes.)
Ensuring America’s
Health is an interesting book because it shows the reader another way that
medicine can be. When I say “medicine” I am mostly talking about how medical
costs are financed. The book follows this evolution thoroughly. What exists now
in America is not the only option, nor are the various European models the
entire world of possibilities. (Singapore, anyone?) There were some obvious
problems with early 20th-century medicine (again, regarding the
financing rather than the hare-brained medical practices of the time). But as Richard
Epstein puts it, “The study of human institutions is always a search for the
most tolerable imperfections.”
The point is not to say, “Let’s return to medical financing
as it was done in the 20th century.” The point is to say, “What can
we learn from a different set of institutional arrangements than the ones we’re
used to?” And “What arguments are made today that historical evidence can
refute?” Americans in the early 20th century were much poorer than
Americans today, and they mostly paid out of pocket for their health care. That
doesn’t mean that out-of-pocket payments are the best possible policy today,
but it certainly refutes the commonly held notion that Americans today are too
poor to pay out-of-pocket. (All Americans? The average American?
Everyone below the 30th percentile? All health expenses, or
just large, infrequent ones? Claims about the unaffordability of healthcare are
usually so imprecise as to be meaningless.)
Chapin starts by describing typical financing in the early
20th century. There was essentially no health insurance. Doctors would
put up a shingle saying “Consultations from $1 to $10.” Since doctors knew who
their patients were, they knew something about each patient’s ability to pay.
They would often make house-calls. They probably knew what profession the head
of the household worked in. They probably knew who was in the local country
club and who was not. In a small community where everybody knows everybody, your
material means are basically public information. With all this information,
doctors were in a good position to practice price discrimination, the charging of different prices for the same service based on willingness to
pay. Think student prices vs list prices for textbooks and software. Or senior
discounts, which are offered not because seniors are poorer than average (far
from it) but rather because seniors often have the free time to shop around for
the best price. (There are sneakier versions of price discrimination, too.) A doctor’s office is an almost perfect opportunity to
price discriminate. There are high fixed costs, like keeping the lights on in
your office, paying staff, and keeping an inventory of medical supplies.
(Admittedly this would all look very different in 1920 than it looks in your
doctor’s office today, but the concept is the same.) The “marginal patient” is someone
who you can profitably treat for $1, but if you charge $1 to each patient you
will go broke and your office will shut down. The cost to treat the marginal
patient is much lower than the average cost of treating a patient, in other
words. The best strategy here is to charge high prices to people with high
willingness to pay (the rich!) and offer lower prices to people with low
willingness to pay (the poor, who often lack both willingness and ability to
pay). Also helping the price discrimination equilibrium, doctors sell something
that cannot be resold, and doctors often hold some degree of monopoly power.
Resellability and robust competition can cause the price discrimination
equilibrium to break down. (Economic exercise: Think about why this is the case.)
Doctors also were under a professional code of conduct that frowned
upon (even shunned) doctors who failed to take care of the indigent. Chapin
managed to speak to many doctors who had practiced in the 50s and 60s, some
even in the 40s, before the era of Medicaid and Medicare. Many of them wrote
off a huge amount of charitable medicine. They either did a lot of pro bono
work or decided the better of trying to collect on patients who failed to pay
up. Something like 30% of the medical service was provided completely free of charge. Keep in mind also that
for medicine that wasn’t free, the rich paid more than the poor. The sliding
scale doctor’s fee in effect created private income redistribution, or
progressive taxation if you want to think of it that way. The poor patient just
barely paid for the doctor’s time and the material cost of the bandages used on
him; the rich patient paid the electricity bill, the phone bill, the nurse’s and
secretary’s salary, and the other fixed costs of running a clinic.
I'm suddenly reminded of someone who has complained to me about the exorbitant price he paid for a minor surgery. I listened sympathetically, but I wanted to say, "Sorry, Jack. The hospital marked you as a well-paid professional and decided to use you to cover its fixed expenses. Poorer patients get a better deal, as they should." If you're poor, you're going to pay just enough to barely cover your marginal expenses (or perhaps even less than that). If you're rich, you're going to be the one paying to keep the lights on and amortizing the cost of that new wing of the hospital.
I'm suddenly reminded of someone who has complained to me about the exorbitant price he paid for a minor surgery. I listened sympathetically, but I wanted to say, "Sorry, Jack. The hospital marked you as a well-paid professional and decided to use you to cover its fixed expenses. Poorer patients get a better deal, as they should." If you're poor, you're going to pay just enough to barely cover your marginal expenses (or perhaps even less than that). If you're rich, you're going to be the one paying to keep the lights on and amortizing the cost of that new wing of the hospital.
The American Medical Association (AMA) was incredibly powerful, more so than it is today. They fought policy changes and legislation that would have changed the practice of medicine. More surprisingly, they fought private efforts to practice medicine under a different model than the one described above. They wanted to maintain physician control over the practice of medicine. They realized that if the practice of medicine were somehow corporatized or if insurance companies began covering the costs of medicine, then other parties would begin dictating how medicine was practiced. No more, "Okay, that'll be $10, because I say that's the price." Suddenly there would be an insurance company saying, "No, we won't pay $10. We'll pay $5. Or we'll place our customers in a different network that plays with us."
Health insurance became commonplace in the 1940s and 1950s, but there were serious problems with the market. Insurance customers wanted a lot more coverage at far lower prices than they were actually getting. (What else is new?) Insurance companies were characteristically conservative. They understood well the adverse selection problem and the moral hazard problem, both of which drive the cost of insurance to astronomical levels and thereby drive insurance premiums to unaffordable levels. Adverse selection means the tendency for sicker people to acquire insurance, knowing that they will be more likely to use it. ("I've got some of the warning signs for diabetes. Better get me a health insurance policy with a great big coverage limit.") Moral hazard means the tendency to incur more costs knowing that someone else is covering them. ("Well, since my insurer is paying for it, throw in a CAT scan and an EKG while you're at it.") Insurance customers felt like the premiums were always too high and the coverage terms were never quite generous enough. Insurance companies, on the other hand, constantly saw their costs running away from them and issued coverage restrictions and premium increases. Many insurers thought health insurance was fundamentally fraught with cost problems and never entered the market in the first place. Existing health insurers exited the market. Americans wanted an "affordable" health insurance with generous coverage, but insurers were unwilling to offer it.
Chapin tells this narrative of customers asking for cheap, generous health insurance and insurers refusing to offer it. I think she could have made the point more explicit: insurance customers wanted a free pony. They basically wanted something that was economically unfeasible. When the private market didn't deliver, that should have been a signal that the thing they "wanted" was in reality something they were unwilling to pay for. This was a classic case of professed preferences being different from revealed preference. Saying you want something versus actually being willing to shell out for it are two different things.
When the private insurance market fails to deliver the goods, demand for political solutions begin to emerge. It was bi-partisan: Truman, Eisenhower, Kennedy, Johnson, and Nixon all had expansions of the medical welfare state on their agendas. The AMA did a lot of red-baiting to counteract these initiatives. They fought all of these attempts to socialize medicine, referring to any change in medical policy as a step toward communism. That's not to say they were wrong to fight any of the specific "reforms" in health care finance. It's just that they lost the public's trust and kind of ended up looking like ogres. The were tone-deaf to the average American, and ultimately they blew their moral authority. To be fair to the AMA, the average American wanted a free pony full of medicine (and frankly it still does). The AMA may have been right in every single policy fight. Right or wrong, their rhetoric made them look unsympathetic. People stopped seeing them as a legitimate authority, and politicians started ignoring their lobbying efforts.
Policy holders complained about the skimpy medical coverage offered in the private market. When political pressure forced insurers to offer more "generous" coverage provisions, those same policyholders complained about the high premiums, which naturally were necessary to cover those generous coverage provisions. Insurers, conservative by nature, were nervous about offering expanded coverage at any feasible price.
Senior citizens were routinely denied health insurance policies, and for good reasons that are familiar to anyone in the insurance industry. In order to be "insurable" in the traditional sense, a risk needs to be "fortuitous from the point of view of the insured." (Fortuitous means "unpredictable", not "fortunate" as it's often used in casual speech.) The poor health experienced by seniors is extremely predictable. The proper way to finance predictable expenses is through saving and/or borrowing, not through an insurance policy. You might want to insure against the possibility that you will have an especially rough decade in your 60s or 70s. But everyone should count on having to use more and more healthcare as they get older. If the typical person has one surgery in their 50s, two in their 60s, and a hip replacement in their 70s, and some chemotheraby in their 80s, and a steady increase in the frequency of office visits over that entire span, then these are predictable expenses, not insurable in the traditional sense. Insurance should not be used to finance this absolutely typical trajectory. In fact it's a waste of money to finance these expenses with insurance, because that incurs the added expenses of claims handling and all the other functions an insurance company performs. Also, the adverse selection and moral hazard problems are looming large. The particularly unhealthy seniors will seek coverage, knowing they will make more use of it. And once insured, even a typical or especially healthy senior might say, "Well...since Blue Cross is paying, maybe I'll do two checkups every year." Insurance companies thoroughly understood these basic concepts of finance, risk, incentives, and probability. But the general public did not. They demanded a free pony. And they demanded expanded coverage for a sympathetic demographic: the elderly. Medicaid, directed specifically at people who lacked the means to pay for healthcare, might be defensible. But Medicare, directed generally at the elderly, was not. A financially unsound insurance policy doesn't suddenly make sense because the government underwrites it. In fact, it tends to make the problem worse, because government programs respond only weakly to financial constraints, and bad government programs never go away. Free markets are disciplined by profits and losses. An unsound insurer can offer overly generous coverage for a little while, but eventually goes insolvent, or the very high premiums drive away all the customers.
Insurance faces some fundamental constraints. I see the political demands for government solutions as attempts to ignore these constraints, not to simply dampen one constraint at the expense of intensifying another. Premiums must cover the cost of paying claims and the expenses related to running an insurance company. A government program that provides health insurance is subject to the same basic "money in equals money out" constraint. Premiums must reflect the relative costs of providing insurance to individual policyholders. Otherwise the good risks don't bother purchasing insurance. If you just charged everyone the overall average price, this is too high a price for the best risks, so they often go without (although particularly risk-averse individuals might buy it anyway). You get the dreaded death spiral, whereby premiums increase, driving away the low-risk individuals, which further increases the average cost of insurance, driving up premiums higher, ad infinitum. (Perhaps not literally ad infinitum, but at least until you reach an equilibrium where far too few people are insured and many of those who are insured are paying way too much.) Finally, the entity paying for medicine has to have the ability to say "No." Otherwise insurance policy holders will ask for the moon. You have to have coverage limits and coverage exclusions, and someone has to push back when unreasonable claims are submitted. These constraints do not disappear when government takes over the insurance sector or issues edicts to the private market. You can try to trade off one constraint for another, but they don't go away.
It would be unfair of me to expect Ensuring America's Health to conduct a thorough cost-benefit analysis of health insurance policy based on these insurance concepts. Chapin's book is an excellent historical account, with events laid out logically and in chronological order. And she actually does a very good job of introducing insurance concepts and even some basic economics. She does so mostly in a "positive" rather than "normative" sense. As in "This is why insurers behaved as they did, this is why insurance customers' demands weren't met by the private market" versus "This is how we ought to design a working health insurance system..." But in my head I kept saying, "The public is asking for the laws of economics to be repealed. Chapin should tell her readers why this is impossible."
The very last chapter of the book brings us up to the present day. It is objective and even-handed. I don't get the sense that Chapin supports or objects specifically to Obamacare. But I found it slightly irksome that she calls it "comprehensive reform". I think Obamacare didn't qualitatively change the health insurance market. It just doubled down on all the bad things we were already doing. (For example, intensifying the link between insurance and employment, intensifying coverage mandates, intensifying restrictions on actuarially sound pricing. It did, unintentionally, lead to more cost sharing because unreasonably high premiums led people to choose higher deductibles, so a minor win there!) But that's just me being picky. I'm not going to consider that a valid criticism of her excellent book. In this last section, she points out that doctors are very comfortable with insurance being the first-dollar payers of all medical costs. I think many hospitals and private practices see this as simply the way things are and support any policy that helps them manage their revenue streams more predictably. The Affordable Care Act was probably good for them from that point of view.
______________________________________________________
Below are some passages I highlighted while reading.
From page 14:
I read the following passage thinking, "Ugh. Here is the original sin."
Chapin concludes the chapter covering the 30s and 40s:
AMA leaders complain (rightly in my opinion) about weird, unreasonable expectations of insurance customers. As an actuary, I can attest that the average customer has very odd ideas about insurance. From page 48:
The medical industry realized it would have to expand coverage voluntarily or else government would force its hand (page 58):
This lovely passage describes how mere economics can constrain your social conscience (page 146) :
Chapin has a good passage on how markets and prices are supposed to function, and how government and even private insurance can screw with the price signal (page 156):
Health insurance became commonplace in the 1940s and 1950s, but there were serious problems with the market. Insurance customers wanted a lot more coverage at far lower prices than they were actually getting. (What else is new?) Insurance companies were characteristically conservative. They understood well the adverse selection problem and the moral hazard problem, both of which drive the cost of insurance to astronomical levels and thereby drive insurance premiums to unaffordable levels. Adverse selection means the tendency for sicker people to acquire insurance, knowing that they will be more likely to use it. ("I've got some of the warning signs for diabetes. Better get me a health insurance policy with a great big coverage limit.") Moral hazard means the tendency to incur more costs knowing that someone else is covering them. ("Well, since my insurer is paying for it, throw in a CAT scan and an EKG while you're at it.") Insurance customers felt like the premiums were always too high and the coverage terms were never quite generous enough. Insurance companies, on the other hand, constantly saw their costs running away from them and issued coverage restrictions and premium increases. Many insurers thought health insurance was fundamentally fraught with cost problems and never entered the market in the first place. Existing health insurers exited the market. Americans wanted an "affordable" health insurance with generous coverage, but insurers were unwilling to offer it.
Chapin tells this narrative of customers asking for cheap, generous health insurance and insurers refusing to offer it. I think she could have made the point more explicit: insurance customers wanted a free pony. They basically wanted something that was economically unfeasible. When the private market didn't deliver, that should have been a signal that the thing they "wanted" was in reality something they were unwilling to pay for. This was a classic case of professed preferences being different from revealed preference. Saying you want something versus actually being willing to shell out for it are two different things.
When the private insurance market fails to deliver the goods, demand for political solutions begin to emerge. It was bi-partisan: Truman, Eisenhower, Kennedy, Johnson, and Nixon all had expansions of the medical welfare state on their agendas. The AMA did a lot of red-baiting to counteract these initiatives. They fought all of these attempts to socialize medicine, referring to any change in medical policy as a step toward communism. That's not to say they were wrong to fight any of the specific "reforms" in health care finance. It's just that they lost the public's trust and kind of ended up looking like ogres. The were tone-deaf to the average American, and ultimately they blew their moral authority. To be fair to the AMA, the average American wanted a free pony full of medicine (and frankly it still does). The AMA may have been right in every single policy fight. Right or wrong, their rhetoric made them look unsympathetic. People stopped seeing them as a legitimate authority, and politicians started ignoring their lobbying efforts.
Policy holders complained about the skimpy medical coverage offered in the private market. When political pressure forced insurers to offer more "generous" coverage provisions, those same policyholders complained about the high premiums, which naturally were necessary to cover those generous coverage provisions. Insurers, conservative by nature, were nervous about offering expanded coverage at any feasible price.
Senior citizens were routinely denied health insurance policies, and for good reasons that are familiar to anyone in the insurance industry. In order to be "insurable" in the traditional sense, a risk needs to be "fortuitous from the point of view of the insured." (Fortuitous means "unpredictable", not "fortunate" as it's often used in casual speech.) The poor health experienced by seniors is extremely predictable. The proper way to finance predictable expenses is through saving and/or borrowing, not through an insurance policy. You might want to insure against the possibility that you will have an especially rough decade in your 60s or 70s. But everyone should count on having to use more and more healthcare as they get older. If the typical person has one surgery in their 50s, two in their 60s, and a hip replacement in their 70s, and some chemotheraby in their 80s, and a steady increase in the frequency of office visits over that entire span, then these are predictable expenses, not insurable in the traditional sense. Insurance should not be used to finance this absolutely typical trajectory. In fact it's a waste of money to finance these expenses with insurance, because that incurs the added expenses of claims handling and all the other functions an insurance company performs. Also, the adverse selection and moral hazard problems are looming large. The particularly unhealthy seniors will seek coverage, knowing they will make more use of it. And once insured, even a typical or especially healthy senior might say, "Well...since Blue Cross is paying, maybe I'll do two checkups every year." Insurance companies thoroughly understood these basic concepts of finance, risk, incentives, and probability. But the general public did not. They demanded a free pony. And they demanded expanded coverage for a sympathetic demographic: the elderly. Medicaid, directed specifically at people who lacked the means to pay for healthcare, might be defensible. But Medicare, directed generally at the elderly, was not. A financially unsound insurance policy doesn't suddenly make sense because the government underwrites it. In fact, it tends to make the problem worse, because government programs respond only weakly to financial constraints, and bad government programs never go away. Free markets are disciplined by profits and losses. An unsound insurer can offer overly generous coverage for a little while, but eventually goes insolvent, or the very high premiums drive away all the customers.
Insurance faces some fundamental constraints. I see the political demands for government solutions as attempts to ignore these constraints, not to simply dampen one constraint at the expense of intensifying another. Premiums must cover the cost of paying claims and the expenses related to running an insurance company. A government program that provides health insurance is subject to the same basic "money in equals money out" constraint. Premiums must reflect the relative costs of providing insurance to individual policyholders. Otherwise the good risks don't bother purchasing insurance. If you just charged everyone the overall average price, this is too high a price for the best risks, so they often go without (although particularly risk-averse individuals might buy it anyway). You get the dreaded death spiral, whereby premiums increase, driving away the low-risk individuals, which further increases the average cost of insurance, driving up premiums higher, ad infinitum. (Perhaps not literally ad infinitum, but at least until you reach an equilibrium where far too few people are insured and many of those who are insured are paying way too much.) Finally, the entity paying for medicine has to have the ability to say "No." Otherwise insurance policy holders will ask for the moon. You have to have coverage limits and coverage exclusions, and someone has to push back when unreasonable claims are submitted. These constraints do not disappear when government takes over the insurance sector or issues edicts to the private market. You can try to trade off one constraint for another, but they don't go away.
It would be unfair of me to expect Ensuring America's Health to conduct a thorough cost-benefit analysis of health insurance policy based on these insurance concepts. Chapin's book is an excellent historical account, with events laid out logically and in chronological order. And she actually does a very good job of introducing insurance concepts and even some basic economics. She does so mostly in a "positive" rather than "normative" sense. As in "This is why insurers behaved as they did, this is why insurance customers' demands weren't met by the private market" versus "This is how we ought to design a working health insurance system..." But in my head I kept saying, "The public is asking for the laws of economics to be repealed. Chapin should tell her readers why this is impossible."
The very last chapter of the book brings us up to the present day. It is objective and even-handed. I don't get the sense that Chapin supports or objects specifically to Obamacare. But I found it slightly irksome that she calls it "comprehensive reform". I think Obamacare didn't qualitatively change the health insurance market. It just doubled down on all the bad things we were already doing. (For example, intensifying the link between insurance and employment, intensifying coverage mandates, intensifying restrictions on actuarially sound pricing. It did, unintentionally, lead to more cost sharing because unreasonably high premiums led people to choose higher deductibles, so a minor win there!) But that's just me being picky. I'm not going to consider that a valid criticism of her excellent book. In this last section, she points out that doctors are very comfortable with insurance being the first-dollar payers of all medical costs. I think many hospitals and private practices see this as simply the way things are and support any policy that helps them manage their revenue streams more predictably. The Affordable Care Act was probably good for them from that point of view.
______________________________________________________
Below are some passages I highlighted while reading.
From page 14:
Page 15:Around the turn of the twentieth century, a typical office sign read “Consultations – from $ 1 to $ 10, Cash.” 10 To formulate the patient's bill, doctors used a sliding fee scale, which not only took into consideration services performed but also the ability to pay...Professional ethics obliged doctors to care for all sick individuals, regardless of ability to pay, and accounting ledgers indicate that charity work was a regular activity for most practitioners. Even in urban areas – where, away from the community's watchful eye, social mores frayed – physicians found serving in charitable hospitals desirable for training students and for acquiring experience managing unusual and interesting cases. Sliding fee scales compelled wealthier patients to subsidize at least some of the physician's charitable care; however, they also encouraged the best doctors to focus on engaging a wealthy clientele.
This should give you an idea of how medicine was practiced and how much discretion physicians had. And the following should tell you how much power they held (page 24):As efficacious medical treatments and Joseph Lister's standards of cleanliness helped transform hospitals into more appealing institutions of care, administrators relied on doctors, not only to continue providing charitable services but also to attract middle- and upper-class patients who could deliver much-needed revenue.
In other words, the AMA sanctioned doctors who accepted insurance arrangements the AMA did not approve of. They also sanctioned models of medical care that they didn't approve of. Chapin points out that they sowed the seeds of government intervention by constraining the market for medicine:Moreover, doctors organized through local medical societies frequently colluded against “unethical” practitioners by refusing to refer patients to them. AMA leaders made explicit their intention to professionally harm any physician who failed to uphold the embargo against group practice and insurance, as, for example, in this 1934 JAMA editorial: "The young physician who is tempted by the offer of some commercial agency to enter into such schemes of combinations should bear in mind that he thereby jeopardizes his entire future in the practice of medicine and sacrifices the medical birthright for which he has already paid six or seven years of his life." Although many practitioners were willing, even eager, to participate in multispecialty groups and prepaid programs, the example of doctors who lost their licenses or hospital privileges convinced most physicians to shun such plans.
The AMA got hit with an anti-trust lawsuit (page 26):Yet even as AMA leaders successfully implemented their economic vision, they simultaneously, by undermining market modernization, paved the way for the very types of governmental intercession they were so keen to avoid.
The month of July 1938 presented extraordinary challenges to AMA political and economic clout. One week after the national conference, AMA leaders, fearing that proposals for government-funded insurance were gaining ground, met with the Technical Committee to offer a compromise. AMA representatives agreed to support each of the committee's recommendations – all of which they had previously opposed – as long as policymakers dropped their advocacy of compulsory health insurance. Technical Committee members refused the deal. Then, on July 31, the Department of Justice filed an antitrust suit against the AMA. Persecution of group doctors had finally caught up with them. AMA officials had collaborated with Washington, D.C. hospitals to deny admitting privileges to physicians associated with the Group Health Association (GHA).Chapin describes how the health insurance model creates perverse incentives to overcharge (page 28):
Under the "indemnity payments to subscribers" model, the doctor charges whatever the heck he wants, and the insurance company has to pony up. An alternative model is that the insurer negotiates with the provider over what will be paid for and what will not, what fees will be paid for which services, which providers are in the network, etc. The AMA's fears about loss of physician sovereignty are coming true. Inevitably insurers will begin to demand some control over how medicine is provided, given that they have to pay for it. They won't tolerate doctors and hospitals saying, "This is the cost. Shut up and pay it." forever.Rather than establishing direct financing relationships with physicians, insurers had to send indemnity payments to subscribers. This compensation structure preserved individual physician-patient financing and allowed doctors to set their own fees. However, indemnity policies drove up service prices because they attenuated the fee-setting restraints placed on doctors when patients paid the entire bill from their own pocket. Physicians could more readily rationalize bill padding when a nameless, faceless company was supplying part of the payment. Sliding fee scales exacerbated the situation. Because doctors were accustomed to setting fees according to the patient's ability to pay, many practitioners charged insured patients higher prices than uninsured patients. Despite this obvious glitch, AMA leaders maintained that “cash (indemnity) benefits only will not disturb or alter the relations of patients, physicians and hospitals.”
I read the following passage thinking, "Ugh. Here is the original sin."
This is it, folks. This is why health insurance is tied to employment. It's a historical accident. The resulting policy is terrible.Long-standing Internal Revenue Service (IRS) rules permitted businesses to count employee fringe benefits as tax write-offs. Thus, when the War Labor Board issued a wage freeze during World War II, employers could simultaneously decrease their tax burden and attract scarce labor by furnishing health insurance.
Chapin concludes the chapter covering the 30s and 40s:
The rules and regulations that AMA leaders attached to medical prepayment produced a costly and inefficient insurance company model. Although there existed many possible ways of configuring health care financing and delivery, AMA heads settled on a faulty model because they believed it offered doctors the best prospects for safeguarding professional power.On the inadequacies of the private health insurance market:
The elderly and chronically ill, who were generally unable to obtain insurance because of their employment status and the financial risks of covering them, relied on family resources or charity for medical care. Moreover, even insured individuals could amass large medical bills. Commercial insurance policies usually covered only a portion of catastrophic costs. Blue Cross provided more generous service benefits; however, the nonprofit's focus on first-dollar costs meant that seriously ill subscribers ran up considerable debt after their allocation of covered hospital days expired.The problems of adverse selection and moral hazard rear their ugly heads (page 46):
Just as underwriters had forecast, insurance company arrangements caused medical service costs and, concomitantly, policy premiums to escalate swiftly. During the late 1940s, right as health insurance gained firm footing among the populace, medical care cost surges began outpacing price increases in all other goods categories in the Consumer Price Index.In other words, any serious insurance professional could have told you this would have happened. The sick, with very high healthcare costs, will be more likely to acquire insurance (the adverse selection problem). And, once insured, patients will tend to seek more care than they otherwise would (the moral hazard problem).
AMA leaders complain (rightly in my opinion) about weird, unreasonable expectations of insurance customers. As an actuary, I can attest that the average customer has very odd ideas about insurance. From page 48:
“The man on the street,” groused AMA official Frank Dickinson, “has been lulled into believing that he is being robbed if he does not get at least one claim check from his health insurance plan almost every year.” Dickinson, who served as director of the AMA's Bureau of Medical Economic Research, observed that “most car owners deem their collision insurance ‘comprehensive,’ even though they must pay the first $50 of a collision claim.”Private insurers tried to educate their customers and potential customers about the underlying drivers of insurance costs (page 49):
Chapin compares the "insurance" model to the prepaid medical group model (page 52):Industry trade associations dispatched speakers to civic organizations, women's groups, and businesses to lecture policyholders on the merits of catastrophic or major medical coverage. Covering small claims, contended industry representatives, produced a system of “trading dollars” that only drove up premium prices. Pamphlets distributed to consumers argued that the purpose of insurance was to protect against large, unforeseeable financial risks, such as those posed by serious accidents or grave diseases.
Proposals to strengthen prepaid group policies failed, and they remained a small market niche. Yet the mere existence of prepaid groups – which commonly provided more generous coverage at lower costs than insurance companies – highlighted inefficiencies in the broader market. Indeed, during the 1970s, policymakers would return to the prepaid group idea under the refurbished label of “Health Maintenance Organizations.”
The medical industry realized it would have to expand coverage voluntarily or else government would force its hand (page 58):
During the 1950s, almost every meeting or publication of private medical groups featured speeches and articles calling on doctors and insurers to prevent federal interference in health care by expanding coverage. An insurance executive summed up the degree to which political purposes had shaped the goals of private interests: '[S] omehow and in some way the base of insurance coverage for protection against disease must be broadened. The Utopia is, of course, that we may evolve a system of total and comprehensive medical care … we should make every effort to achieve this goal by voluntary means instead of by compulsion.' To thwart legislative initiatives, not only did voluntary interests have to cover more citizens, they also had to reconceptualize the function of insurance. Stripped-down policies that covered only a portion of hospital costs were no longer feasible – nothing less than all-inclusive benefits would satisfy the objectives laid out by policymakers.You can sort of get around the adverse selection problem by issuing "group rates" to all the employees working for a certain employer (for example; there are other conceivable ways of grouping for the sake of group rating). But group rating isn't exactly a perfect solution. Page 62:
Because group benefits were linked to employment, women were less likely to have coverage. Only one-third of women worked for wages during the 1950s and of those, two-thirds worked part-time or seasonally. Although employers increasingly offered workers coverage for dependents, the practice linked women's health care access to a male breadwinner. Additionally, as benefits were related to one's position in the corporate hierarchy, African Americans, the working poor, and rural laborers often lacked insurance. A 1955 survey found that although 80 percent of families with annual incomes over $ 5,000 had insurance, only 40 percent of families with earnings below $ 3,000 and 45 percent of rural residents owned medical coverage.On the AMA's dysfunction (page 67):
Through these battles, physician leaders frittered away political authority with inflexible arguments that often failed to advance beyond red-baiting. Many of the AMA's difficulties, including its inability to formulate an effective long-term political strategy, were rooted in organizational characteristics. The leadership was drawn from an elite group of physicians who were largely detached from the concerns of rank-and-file doctors. Moreover, two governing bodies shared and thus bickered over responsibility for association policies. When the leadership did find consensus on an issue, that decision was then ground through a sprawling bureaucracy that chipped away at the original objective until only a withered fragment remained. In combination with the association's political tactics, the organizational structure undermined member cohesion. Numerous political fights aggravated members with differing ideological opinions, while the association's decentralized, democratic structure bred conflict.More on the AMA being out-of-touch with its constituents (page 81):
Complaining about the “big-shot specialists” who issued “communiqués from the Chicago Citadel,” one member observed that “[ n] o one knows better what the common people need and desire, what local handicaps to health services there are, than the little family medic – who is never asked to express his opinion.” Grassroots sentiments seldom found a hearing before national leaders because years of moving up the ranks through county, state, and then national office required physicians to impress already-established officials. Consequently, the AMA's leadership seemed inflexible and aged. With an average age of fifty-nine, most delegates were nearing retirement.And they were prescient enough to poison their future moral credibility, too (page 88):
Particularly in the South, black physicians were refused admission to the AMA; indeed, most of them would not have bothered to apply.The following paragraph gives a pretty good summary (page 94):
Once the AMA designated the insurance company model the only suitable form of medical prepayment, physicians ceded every opportunity to move the health care economy toward more efficient and inexpensive care. AMA leaders went through the motions of expressing interest in economic matters. They created councils and committees to study insurance and appointed representatives to confer with insurers. They also knew what they did not like: any third-party financing that might infringe upon physician autonomy or pay. This reactionary, backward-looking stance of AMA leaders left to insurance companies the primary responsibility for developing the health care market and also created political difficulties as policymakers looked for ways to make medical services more accessible.Chapin describes an episode near the turn of the century where financially sound insurance companies acquired insolvent and shady insurance companies that were unable to cover their liabilities. These insurers went beyond just covering medical costs. They actually took on the duty of improving public health by educating their policyholders (page 99):
Both the LIAA and ALC sponsored advertisements, placed magazine articles, and published pamphlets emphasizing the industry's financial stability and spotlighting the peace of mind that families with insurance enjoyed. Representatives from both associations worked closely with state regulators to develop laws designed to drive out fraudulent and marginal companies. Northeastern firms banded together to assume the policies of more than thirty companies that were unable, because of financial stress or fraud, to fulfill subscriber obligations. The largest industry enterprise, Metropolitan Life Insurance of New York, initiated a decades-long program that, in an effort to protect policyholders and often at the behest of state regulators, regularly purchased failing companies. Leading firms also launched public health campaigns that simultaneously boosted the industry's image while serving customer needs and reducing policyholder mortality rates due to infectious ailments. A multicompany bureau was established to provide subscriber medical exams and send representatives to discuss any identified health problems with the policyholder's doctor. Metropolitan dispatched nurses to tend to sick policyholders, primarily by instructing their families on hygiene and caretaking duties. The company carried out a massive health education drive that, through leaflets and advertisements, informed the general public about topics ranging from the “care of children” to “flies and filth.”The following quote is a word of caution from insurance companies to congress. It is basically a warning that government is not magic (page 106):
Government reinsurance of health insurance plans would introduce no magic into the field of financing health care costs. … Reinsurance does not reduce the cost of insurance. Reinsurance does not make insurance available to any class of risk … not now within the capability of voluntary insurance to reach.A brief note on the competitive nature of the market in 1950:
By the early 1950s, approximately eight hundred commercial companies offered some form of medical insurance.Chapin tries to correct a mistaken narrative of the history of 20th century health insurance (page118):
Scholars who assume that commercial companies cherry-picked healthy employee groups out of the broader insurance pool and left nonprofits to cover higher-risk individuals have somewhat mischaracterized the industry's behavior. 93 By 1960, commercial companies sold approximately 40 percent of their hospitalization policies to individuals. 94 Moreover, during the 1950s, about three-fifths of HIAA companies took steps to limit the quantity of subscriber renewals they would refuse due to declining health. More than seventy firms introduced policies that were guaranteed renewable for life – though, of course, premium prices could rise. 95 In sum, to undermine arguments in favor of government intervention in their field, commercial leaders had to demonstrate their industry's social responsibility and pursuit of the public interest; they attempted to accomplish this mission by insuring a significant portion of the individual-purchase market, including some high-risk subscribers. At the end of the 1950s, when reformers ramped up their campaign to supply aged citizens with health insurance through Social Security, HIAA firms employed extraordinary measures to combat the legislation. Insurance companies began permitting workers with policies supplied through their employer to retain coverage upon retirement.Attempts to standardize care for the sake of keeping medical costs reasonable were resisted by local doctors who resented the "formula." Today you sometimes hear the war-cry "I don't practice cook-book medicine." This apparently has a long history:
Physicians who jealously guarded their control over plan operations branded the MIA [Medical Indemnity of America] “a grab for power” by national leaders. A frustrated NABSP [National Association of Blue Shield Plans] representative commented that it “was as if General Mills tried to do a national business while each of its local plants made cake-mixes by its own formula.”I'm suddenly remembering that the acronyms made the book hard to read in parts. You can easily lose track of who's doing what to whom and why.
This lovely passage describes how mere economics can constrain your social conscience (page 146) :
Neglect of basic tenets of insurance also contributed to Blue Shield's anemic pecuniary condition. Nonprofit leaders chided for-profit companies for hesitating to underwrite health insurance and then entering the field with an abundance of caution. Yet the commercial industry's behavior reflected a rational fear of the costs associated with the insurance company model and a more sophisticated understanding of actuarial principles. Describing how early nonprofit plans determined the financial reserves necessary to support policy offerings, one administrator proudly explained that “there were no statistics or actuarial bases, it was merely an idea.” At the time, commercial insurers also lacked dependable actuarial data; however, nonprofit leaders evinced a more reckless, seat-of-the-pants attitude. Even at the end of the 1950s, once commercial insurers had begun constructing reliable morbidity tables, nonprofit administrators continued to lean too heavily on “whims and fancies” rather than statistical formulations.In other words, you can have extremely good intentions, but if you run out of money you won't do anyone any good.
Chapin has a good passage on how markets and prices are supposed to function, and how government and even private insurance can screw with the price signal (page 156):
Markets discipline through price. In properly functioning markets, prices convey information about supply and demand to consumers and producers. If demand increases for a particular service, prices rise, thus signaling to consumers to buy prudently. Price increases also encourage providers to enter the market, which, by raising service supply, drives down prices. In government-directed systems, officials hold down prices by setting agency or regional budgets. Under the insurance company model, the liability of paying for care was transferred from patients to insurance organizations, thereby altering the perception of prices in the minds of consumers, sending an artificial signal that they had been lowered. Meanwhile, insurance companies lacked effective means of regulating physicians and hospitals. Consequently, neither markets nor the government controlled provider fee setting or service supply.On how insurance induces insureds to use unnecessary medicine (page 158):
An investigation conducted by Michigan Blue Cross during the early 1950s determined that one-fifth of subscriber hospital days were unnecessary and 28 percent of admissions involved some element of “faulty use.” 18 Later in the decade, a nationwide study found that on an annual basis, per one hundred individuals, uninsured persons spent an average of seventy days in the hospital while insured patients racked up one hundred days.
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Third-party funding in combination with doctors’ traditional reliance on sliding fee scales produced a ready vehicle for physician bill padding. Because doctors had always taken the patient's ability to pay into account when calculating fees, many practitioners inflated service prices for insurance subscribers. Bill padding diminished the value of indemnity policies. For example, a 1950s Indiana investigation revealed that approximately half of the indemnity policyholders under study were charged higher fees than uninsured patients.A short passage summarizing how medical insurance changed the way medicine was financed (page 191):
Depending on the stability and affluence of their customer base, physicians wrote off between 10 and 40 percent of patient bills as uncollectible. Because of the difficulty and expense of collecting patient fees and because some insurance subscribers chose to pocket indemnity checks rather than pay their medical bills, a number of physicians, flouting the preferences of AMA leaders, lobbied insurance companies for direct compensation. By the mid-1960s, physicians received between 30 and 70 percent of their income directly from insurance companies. These direct financing linkages severed doctor-patient monetary relationships and became crucial conduits through which insurance companies intensified cost containment measures.Chapin summarizes the nationalization of medicine in the 1960s to present (page 234):
Spiraling costs drove insurers and, after Medicare's passage, government officials to attempt to close the institutional gap that separated them, the financiers, from doctors and hospitals. Third parties implemented cost containment measures, which entailed insurers wading into the medical delivery process to supervise physician work and regulate provider remuneration. This process unfolded gradually and generated substantial conflict as organized physicians still retained a good deal of influence, which they wielded in political fights and in battles against third-party payers. Nonetheless, the very outcome that AMA leaders initially sought to prevent had come to fruition – physicians were now bound within a corporate structure of their own, inadvertent making.And the absurd cost inflation that it lead to (page 235):
By 1970, physician fees were growing at twice the rate of average consumer price increases while hospital charges were rising five times more rapidly. The “massive crisis” and “soaring” costs of a system “teetering on the brink of disaster” dismayed voters and policymakers and triggered a litany of questions about the shortcomings of U.S. health care.Read the whole thing.
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