Baylor University’s Initial Concept for Care Eventually Led to an Economic Behemothby Kelly R. Smith
This article was updated on 05/04/21.
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Today we are surrounded by so many high-tech medical apparatuses and procedures that we take them for granted. For example, I recently had laparoscopic inguinal (groin) hernia surgery. No scalpel slashing, just 3 punctures. All the work was done microscopically and I was on my feet within 3 hours. Now, that’s good customer service.
But it wasn’t always that way. More than 90% of commonly accepted medicine did not even exist in the 1950s. One of the consequences is that people, average people, not just the monied upper-crust, are living longer. A greater understanding of things like controlling high blood pressure adds years and quality of life.
The Cost of Modern Medicine
It should come as no surprise that all this progress comes with a cost. In fact, it has been rising faster than any other expenditure when looked at on a national level. Flash back if you will to 1930–we spent $2.8 billion on health care. That equates to 3.5% of the gross domestic product (GDP) or only $23 per person.
In 2015 that rose to $3 trillion. That’s $9,536 per person or 15% of GDP. During the 1980s medical expenditures rose by 117%. Of that, 43% can be attributed to inflation. 10% can be attributed to the rise in population and longer life expectancy. 23% was due to new technology, medicines, and treatment innovations. The remaining 24% is due to another instance of inflation that resides totally within the medical community. This last number tells us that there is a lack of oversight and cost transparency. There is no financial propping up as with the banking, agricultural, and auto-building industries.
The Transformation of Hospitals
It was only in the 1850s that the medical community realized that diseases were caused by microorganisms. This became known as the germ theory of disease and it was indeed revolutionary. It led to research that was to begin to focus on preventative rather than just curative treatment. Rabies was banished from human population in 1885. Diphtheria and whooping cough were brought under control. When milk began to be pasteurized the death rate of children went from 125.1/thousand to 15.8/thousand in 1925.
In 1873 hospitals, of which there were only 149 in the country, were more like hospices; the poor and and deathly-ill went there to die; those institutions were little more than petri dishes, not at all sanitary. But that changed because of the changes brought about by germ theory.
By 100 years later the number of hospitals had increased to over 7,000 and their role had morphed into medical research and clinical medicine. Exciting times. But… they cost a lot to operate and the number of patients could not be reliably estimated. The solution? Late in the 1920s hospital insurance was introduced in Dallas, Texas to stabilize cash flow. For a premium of $6 per year Baylor University Hospital would provide 21 days of care to subscribers.
Soon other hospitals adopted this model and formed confederations so that patients could choose a treatment facility. This was the business model for Blue Cross which launched in California in 1932. These were rudimentary insurance plans; they did not include co-pays or deductions, just fixed premiums meant to stabilize cash flow. One consequence is that patients gravitated toward hospital stays (expensive) rather than outpatient treatments (cheaper).
This insurance was paid directly to the hospital and not to the individual. This eliminated any opportunity to “shop around.” Since the money was not coming itemized out of the patient’s pocket, why should he or she care what the price tag was?
The Government Fails to Regulate Medical Insurance
During the mid to late 30s Blue Cross was spreading rapidly. The states moved to try to regulate them to the same standards as other types of “insurance.” But the American Medical Association and the American Hospital Association lobbied to be exempt, claiming an exception due to operating on a non-profit basis. The IRS agreed and ruled that they were also exempt from federal taxation. Blue Cross and other insurance companies emerging in the field operated on a cost-plus basis. Now there was zero incentive to control costs an strive for efficiency.
Hospitals began to compete not on price but by wooing doctor referrals. Doctors were being paid “reasonable and customary” charges. If Dr. C began charging a bit more, Dr. A and Dr. B would follow suit and the standard of “reasonable and customary” inched up. No oversight.
The Modern Medical Insurance Paradigm
When World War II drew us in, two things happened. One, the labor market got tighter since more workers enlisted in the military. Two, price and wage controls were implemented. In order to attract the best employees, companies began offering employer-paid health insurance as a fringe benefit which the IRS recognized as a business expense.
The National Labor Relations Board imposed collective bargaining on health insurance plans so unions began to demand more and more, driving prices up. But a consequence was that the patient became further distanced from the medical system and they lost many choices; one must take what is offered.
In 1965 the government waded into the medical market with Medicaid and Medicare. Initially, hospitals and doctors resisted but when they began to reap the dividends they quickly changed their tune. Now state governments largely controlled the purse strings of most major hospitals and thus could influence policy.
More recently a major factor in driving up medical costs is litigation. Medical malpractice suits have exploded. Cases have increased by a 1:300 ratio in the years from 1969 to 1990 alone. A special class of lawyers have even emerged to take advantage of this low-hanging fruit; these are your ambulance-chasers and your class-action law firms where actual plaintiffs make pennies while the lawyers walk away with the bulk of the settlements.
This short history of American medical insurance should serve to put things into perspective as we have a national debate over how it really should be handled. Should we stay on our present course or model our system on Britain or Canada? Should we believe in a socialist “free for all” system as Bernie Sanders advocates? (Hint: there’s no such thing as free.) Should we adopt an Obamacare model complete with a Jacobin death panel? This will continue to be an evolving national debate.
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