Historian offers useful background information about American health insurance

John Steele Gordon explains in a recent edition of Hillsdale College’s Imprimis how the history of American medical insurance has helped lead to present-day challenges.

The original hospital insurance also contained the seeds of two other major economic dislocations, unnoticed in the beginning, that have come to loom large. The first dislocation is that while people purchased hospital plans to be protected against unpredictable medical expenses, the plans only paid off if the medical expenses were incurred in a hospital. As a result, cases that could be treated on an outpatient basis instead became much more likely to be treated in the hospital—the most expensive form of medical care.

The second dislocation was that hospital insurance did not provide indemnity coverage, which is when the insurance company pays for a loss and the customer decides how best to deal with it. Rather than indemnification, the insurance company provided service benefits. In other words, it paid the bill for services covered by the policy, whatever the bill was. As a result, there was little incentive for the consumer of medical services to shop around. With someone else paying, patients quickly became relatively indifferent to the cost of medical care.

These dislocations perfectly suited the hospitals, which wanted to maximize the amount of services they provided and thereby maximize their cash flow. If patients are indifferent to the costs of medical services they buy, they are much more likely to buy more of them and the cost of each service is likely to go up. There is no price competition to keep prices in check.

Predictably, the medical profession began to lobby in favor of retaining this system.

Mitch Kokai / Senior Political Analyst

Mitch Kokai is senior political analyst for the John Locke Foundation. He joined JLF in December 2005 as director of communications. That followed more than four years as chie...