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Health Insurance in the United States
=====================================

Melissa Thomasson, Miami University
-----------------------------------

This article describes the development of the U.S. health insurance
system and its growth in the twentieth century. It examines the roles
of important factors including medical technology, hospitals and
physicians, and government policy culminating in the development of
Medicare and Medicaid.

1900-1920: Sickness Insurance versus Health Insurance
-----------------------------------------------------

Prior to 1920, the state of medical technology generally meant that
very little could be done for many patients, and that most patients
were treated in their homes. Table 1 provides a list of pioneering
early advances in medicine. Hospitals did not assume their modern form
until after the turn of the century when antiseptic methods were well
established. Even then, surgery was often performed in private homes
until the 1920s.

Table 1: Milestones in Medical Technology

1850-1870: Louis Pasteur, Joseph Lister and others develop
understanding of bacteriology, antisepsis, and immunology.

1870-1910: Identification of various infectious agents including
spirochaeta pallida (syphilis), typhus, pneumococcus, and malaria.
Diphtheria antitoxin developed. Surgery fatality rates fall.

1887: S.S.K. von Basch invents instrument to measure blood pressure.

1895: Wilhelm Roentgen develops X-rays.

1910: Salvarsan (for syphilis) proves to be first drug treatment that
destroys disease without injuring patient.

1920-1946: Insulin isolated (1922), sulfa developed (1935),
large-scale production of synthetic penicillin begins (1946).

1955: Jonas Salk announces development of vaccine for polio.

Medical Expenditures Initially Low

Given the rudimentary state of medical technology before 1920, most
people had very low medical expenditures. A 1918 Bureau of Labor
Statistics survey of 211 families living in Columbus, Ohio found that
only 7.6 of their average annual medical expenditures paid for
hospital care (Ohio Report, p. 116). In fact, the chief cost
associated with illness was not the cost of medical care, but rather
the fact that sick people couldn't work and didn't get paid. A 1919
State of Illinois study reported that lost wages due to sickness were
four times larger than the medical expenditures associated with
treating the illness (State of Illinois, pp. 15-17). As a result, most
people felt they didn't need health insurance. Instead, households
purchased "sickness" insurance -- similar to today's "disability"
insurance -- to provide income replacement in the event of illness.1

Insurance Companies Initially Unwilling to Offer Health Insurance
Policies

The low demand for health insurance at the time was matched by the
unwillingness of commercial insurance companies to offer private
health insurance policies. Commercial insurance companies did not
believe that health was an insurable commodity because of the high
potential for adverse selection and moral hazard. They felt that they
lacked the information to accurately calculate risks and write
premiums accordingly. For example, people in poor health may claim
they to be healthy and then sign up for health insurance. A problem
with moral hazard may arise if people change their behavior -- perhaps
engaging in more risky activities -- after they purchase health
insurance. According to The Insurance Monitor, "the opportunities for
fraud in health insurance upset all statistical calculations....
Health and sickness are vague terms open to endless construction.
Death is clearly defined, but to say what shall constitute such loss
of health as will justify insurance compensation is no easy task"
(July 1919, vol. 67 (7), p. 38).

Failure of Compulsory, Nationalized Health Insurance

The fact that people generally felt actual health insurance (as
opposed to sickness insurance) was unnecessary prior to 1920 also
helped to defeat proposals for compulsory, nationalized health
insurance in the same period. Although many European nations had
adopted some form of compulsory, nationalized health insurance by
1920, proposals sponsored by the American Association for Labor
Legislation (AALL) to enact compulsory health insurance in several
states were never enacted (see Numbers 1978). Compulsory health
insurance failed in this period for several reasons. First, popular
support for the legislation was low because of the low demand for
health insurance in general. Second, physicians, pharmacists and
commercial insurance companies were strong opponents of the
legislation. Physicians opposed the legislation because they feared
that government intervention would limit their fees. Pharmacists
opposed the legislation because it provided prescription drugs they
feared would undermine their business. While commercial insurance
firms did not offer health insurance during this period, a large part
of their business was offering burial insurance to pay funeral costs.
Under the proposed legislation, commercial firms would be excluded
from offering burial insurance. As a result, they opposed the
legislation, which they feared would also open the door towards
greater government intervention in the insurance business.

1920-1930: The Rising Price of Medical Care
-------------------------------------------

As the twentieth century progressed, several changes occurred that
tended to increase the role that medicine played in people's lives and
to shift the focus of treatment of acute illness from homes to
hospitals. These changes caused the price of medical care to rise as
demand for medical care increased and the cost of supplying medical
care rose with increased standards of quality for physicians and
hospitals.

Increases in the Demand for Medical Care

As the population shifted from rural areas to urban centers, families
lived in smaller homes with less room to care for sick family members
(Faulkner 1960, p. 509). Given that health insurance is a normal good,
rising incomes also helped to increase demand. Advances in medical
technology along with the growing acceptance of medicine as a science
led to the development of hospitals as treatment centers and helped to
encourage sick people to visit physicians and hospitals. Rosenberg
(1987) notes that "by the 1920s… prospective patients were influenced
not only by the hope of healing, but by the image of a new kind of
medicine -- precise, scientific and effective" (p. 150). This
scientific aura began to develop in part as licensure and standards of
care among practitioners increased, which led to an increase in the
cost of providing medical care.

Rising Medical Costs

Physician quality began to improve after several changes brought about
by the American Medical Association (AMA) in the 1910s. In 1904, the
AMA formed the Council on Medical Education (CME) to standardize the
requirements for medical licensure. The CME invited Abraham Flexner of
the Carnegie Foundation for the Advancement of Teaching to evaluate
the status of medical education. Flexner's highly critical report on
medical education was published in 1910. According to Flexner, the
current methods of medical education had "... resulted in enormous
over-production at a low level, and that, whatever the justification
in the past, the present situation... can be more effectively met by a
reduced output of well trained men than by further inflation with an
inferior product" (Flexner, p. 16). Flexner argued for stricter
entrance requirements, better facilities, higher fees, and tougher
standards. Following the publication of the Flexner Report, the number
of medical schools in the United States dropped from 131 in 1910 to 95
in 1915. By 1922, the number of medical schools in the U.S. had fallen
even further to 81 (Journal of the American Medical Association,
August 12, 1922, p. 633). These increased requirements for physician
licensure, education and the accreditation of medical schools
restricted physician supply, putting upward pressure on the costs of
physicians' services.2

After Flexner's report, a further movement towards standardization and
accreditation came in 1913, when the American College of Surgeons
(ACS) was founded. Would-be members of the ACS had to meet strict
standards. For a hospital to gain the accreditation of the ACS, it had
to meet a set of standards relating to the staff, records, and
diagnostic and therapeutic facilities available. Of 692 large
hospitals examined in 1918, only 13 percent were approved. By 1932, 93
percent of the 1,600 hospitals examined met ACS requirements (Shyrock
1979, p. 348).

Increasing requirements for licensure and accreditation, in addition
to a rising demand for medical care, eventually led to rising costs.
In 1927, the Committee on the Costs of Medical Care (CCMC) was formed
to investigate the medical expenses of American families. Comprised of
physicians, economists, and public health specialists, the CCMC
published 27 research reports, offering reliable estimates of national
health care expenditures. According to one CCMC study, the average
American family had medical expenses totaling $108 in 1929, with
hospital expenditures comprising 14 percent of the total bill (Falk,
Rorem, and Ring 1933, p. 89). In 1929, medical charges for urban
families with incomes between $2,000 and $3,000 per year averaged $67
if there were no hospitalizations, but averaged $261 if there were any
illnesses that required hospitalization (see Falk, Rorem, and Ring).
By 1934, Michael M. Davis, a leading advocate of reform, noted that
hospital costs had risen to nearly 40 percent of a family's medical
bill (Davis 1934, p. 211). By the end of the 1920s, families began to
demand greater amounts of medical care, and the costs of medical care
began to increase.

1930-1940: The Birth of Blue Cross and Blue Shield
--------------------------------------------------

Blue Cross: Hospital Insurance

As the demand for hospital care increased in the 1920s, a new payment
innovation developed at the end of the decade that would revolutionize
the market for health insurance. The precursor to Blue Cross was
founded in 1929 by a group of Dallas teachers who contracted with
Baylor University Hospital to provide 21 days of hospitalization for a
fixed $6.00 payment. The Baylor plan developed as a way to ensure that
people paid their bills. One official connected with the plan compared
hospital bills to cosmetics, noting that the nation's cosmetic bill
was actually more than the nation's hospital bill, but that "We spend
a dollar or so at a time for cosmetics and do not notice the high
cost. The ribbon counter clerk can pay 50¢, 75¢, or $1 a month,
yet.... it would take about twenty years to set aside a large hospital
bill" (The American Foundation 1937, p. 1023).

Pre-paid hospital service plans grew over the course of the Great
Depression. Pre-paid hospital care was mutually advantageous to both
subscribers and hospitals during the early 1930s, when consumers and
hospitals suffered from falling incomes. While the pre-paid plans
allowed consumers to affordably pay for hospital care, they also
benefited hospitals by providing them with a way to earn income during
a time of falling hospital revenue. Only 62 percent of beds in private
hospitals were occupied on average, compared to 89 percent of beds in
public hospitals that accepted charity care (Davis and Rorem 1932, p.
5). As one pediatrician in the Midwest noted, "Things went swimmingly
as long as endowed funds allowed the hospitals to carry on. When the
funds from endowments disappeared the hospitals got into trouble and
thus the various plans to help the hospitals financially developed"
(American Foundation 1937, p. 756).

The American Hospital Association (AHA) encouraged hospitals in such
endeavors ostensibly as a means of relieving "... from financial
embarrassment and even from disaster in the emergency of sickness
those who are in receipt of limited incomes" (Reed 1947, p. 14).
However, the prepayment plans also clearly benefited hospitals by
giving them a constant stream of income. Since single-hospital plans
generated greater competition among hospitals, community hospitals
began to organize with each other to offer hospital coverage and to
reduce inter-hospital competition. These plans eventually combined
under the auspices of the AHA under the name Blue Cross.

Blue Cross Designed to Reduce Price Competition among Hospitals

The AHA designed the Blue Cross guidelines so as to reduce price
competition among hospitals. Prepayment plans seeking the Blue Cross
designation had to provide subscribers with free choice of physician
and hospital, a requirement that eliminated single-hospital plans from
consideration. Blue Cross plans also benefited from special
state-level enabling legislation allowing them to act as non-profit
corporations, to enjoy tax-exempt status, and to be free from the
usual insurance regulations. Originally, the reason for this exemption
was that Blue Cross plans were considered to be in society's best
interest since they often provided benefits to low-income individuals
(Eilers 1963, p. 82). Without the enabling legislation, Blue Cross
plans would have had to organize under the laws for insurance
companies. If they organized as stock companies, the plans would have
had to meet reserve requirements to ensure their solvency. Organizing
as mutual companies meant that they would either have to meet reserve
requirements or be subject to assessment liability.3 Given that most
plans had little financial resources available to them, they would not
have been able to meet the requirements.

The enabling legislation freed the plans from the traditional
insurance reserve requirements because the Blue Cross plans were
underwritten by hospitals. Hospitals contracted with the plans to
provide subscriber services, and agreed to provide service benefits
even during periods when the plans lacked funds to provide
reimbursement. Under the enabling legislation, the plans "enjoy the
advantages of exemption from the regular insurance laws of the state,
are freed from the obligation of maintaining the high reserves
required of commercial insurance companies and are relieved of paying
taxes" (Anderson 1944, p. 11).4 Enabling laws served to increase the
amount of health insurance sold in states in which they were
implemented, causing growth in the market (Thomasson 2002).

Blue Shield: Insurance for Physician Services

Despite the success of Blue Cross and pre-paid hospitalization
policies, physicians were much slower in providing pre-paid care. Blue
Cross and Blue Shield developed separately, with little coordination
between them (McDavitt 1946). Physicians worried that a third-party
system of payment would lower their incomes by interfering with the
physician-patient relationship and restricting the ability of
physicians to price discriminate. However, in the 1930s, physicians
were faced with two situations that spurred them to develop their own
pre-paid plans. First, Blue Cross plans were becoming popular, and
some physicians feared that hospitals would move into the realm of
providing insurance for physician services, thus limiting physician
autonomy. In addition, advocates of compulsory health insurance looked
to the emerging social security legislation as a logical means of
providing national health care. Compulsory health insurance was even
more anathema to physicians than voluntary health insurance. It became
clear to physicians that in order to protect their interests, they
would be better off pre-empting both hospitals and compulsory
insurance proponents by sculpting their own plan.

Thus, to protect themselves from competition with Blue Cross, as well
as to provide an alternative to compulsory insurance, physicians began
to organize a framework for pre-paid plans that covered physician
services. In this regard, the American Medical Association (AMA)
adopted a set of ten principles in 1934 "... which were apparently
promulgated for the primary purposes of preventing hospital service
plans from underwriting physician services and providing an answer to
the proponents of compulsory medical insurance" (Hedinger 1966, p.
82). Within these rules were provisions that ensured that voluntary
health insurance would remain under physician supervision and not be
subject to the control of non-physicians. In addition, physicians
wanted to retain their ability to price discriminate (to charge
different rates to different customers, based on their ability to
pay).

These principles were reflected in the actions of physicians as they
established enabling legislation similar to that which allowed Blue
Cross plans to operate as non-profits. Like the Blue Cross enabling
legislation, these laws allowed Blue Shield plans to be tax-exempt and
free from the provisions of insurance statutes. Physicians lobbied to
ensure that they would be represented on the boards of all such plans,
and acted to ensure that all plans required free choice of physician.
In 1939, the California Physicians' Service (CPS) began to operate as
the first prepayment plan designed to cover physicians' services. Open
to employees earning less than $3,000 annually, the CPS provided
physicians' services to employee groups for the fee of $1.70 per month
for employees (Scofea, p. 5). To further these efforts, the AMA
encouraged state and local medical societies to form their own
prepayment plans. These physician-sponsored plans ultimately
affiliated and became known as Blue Shield in 1946.

Blue Shield plans offered medical and surgical benefits for
hospitalized members, although certain plans also covered visits to
doctors' offices. While some plans were like the Blue Cross plans in
that they offered service benefits to low-income subscribers (meaning
that the plans directly reimbursed physicians for services), most Blue
Shield plans operated on a mixed service-indemnity basis. Doctors
charged patients who were subscribers to Blue Shield the difference
between their actual charges and the amount for which they were
reimbursed by Blue Shield. In this manner, doctors could retain their
power to price discriminate by charging different prices to different
patients.

1940-1960: Growth in the Health Insurance Market
------------------------------------------------

After the success of Blue Cross and Blue Shield in the 1930s,
continued growth in the market occurred for several reasons. The
supply of health insurance increased once commercial insurance
companies decided to enter the market for health coverage. Demand for
health insurance increased as medical technology further advanced, and
as government policies encouraged the popularity of health insurance
as a form of employee compensation.

Growth in Supply: Commercial Insurance Companies Enter the Market

Blue Cross and Blue Shield were first to enter the health insurance
market because commercial insurance companies were reluctant to even
offer health insurance early in the century. As previously mentioned,
they feared that they would not be able to overcome problems relating
to adverse selection, so that offering health insurance would not be
profitable. The success of Blue Cross and Blue Shield showed just how
easily adverse selection problems could be overcome: by focusing on
providing health insurance only to groups of employed workers. This
would allow commercial insurance companies to avoid adverse selection
because they would insure relatively young, healthy people who did not
individually seek health insurance. After viewing the success of Blue
Cross and Blue Shield, commercial health insurance companies began to
move rapidly into the health insurance market. As shown in Figure 1,
the market for health insurance exploded in size in the 1940s, growing
from a total enrollment of 20,662,000 in 1940 to nearly 142,334,000 in
1950 (Health Insurance Institute 1961, Source Book, p. 10). As the
Superintendent of Insurance in New York, Louis H. Pink, noted in 1939

... There are twenty stock insurance companies which are today issuing
in this state Individual Medical Reimbursement, Hospitalization, and
Sickness Expense Policies. About half of these have only recently gone
into this field. It is no doubt the interest aroused by the non-profit
associations which has induced the regular insurance companies to
extend their activities in this way (Pink 1939).

Figure 1: Number of Persons with Health Insurance (thousands),
1940-1960

 

Source: Source Book of Health Insurance Data, 1965.

Community Rating versus Experience Rating

The success of commercial companies was aided by two factors. First,
the competitiveness of Blue Cross and Blue Shield was limited by the
fact that their non-profit status required that they community rate
their policies. Under a system of community rating, insurance
companies charge the same premium to sicker people as they do to
healthy people. Since they were not considered to be nonprofit
organizations, commercial insurance companies were not required to
community rate their policies. Instead, commercial insurance companies
could engage in experience rating, whereby they charged sicker people
higher premiums and healthier people lower premiums. As a result,
commercial companies could often offer relatively healthy groups lower
premiums than the Blue Cross and Blue Shield plans, and gain their
business. Thus, the commercial health insurance business boomed, as
shown in Figure 2.

Figure 2: Enrollment in Commercial Insurance Plans v. Blue Cross and
Blue Shield

 

Source: Source Book of Health Insurance Data, 1965.

Figure 2 illustrates the growth of commercial insurance relative to
Blue Cross and Blue Shield. So successful was commercial insurance
that by the early 1950s, commercial plans had more subscribers than
Blue Cross and Blue Shield. In 1951, 41.5 million people were enrolled
in group or individual hospital insurance plans offered by commercial
insurance companies, while only 40.9 million people were enrolled in
Blue Cross and Blue Shield plans (Health Insurance Institute 1965,
Source Book, p. 14).

Growth in Demand: Government Policies that Encouraged Health Insurance

Offering insurance policies to employee groups not only benefited
insurers, but also benefited employers. During World War II, wage and
price controls prevented employers from using wages to compete for
scarce labor. Under the 1942 Stabilization Act, Congress limited the
wage increases that could be offered by firms, but permitted the
adoption of employee insurance plans. In this way, health benefit
packages offered one means of securing workers. In the 1940s, two
major rulings also reinforced the foundation of the employer-provided
health insurance system. First, in 1945 the War Labor Board ruled that
employers could not modify or cancel group insurance plans during the
contract period. Then, in 1949, the National Labor Relations Board
ruled in a dispute between the Inland Steel Co. and the United
Steelworkers Union that the term "wages" included pension and
insurance benefits. Therefore, when negotiating for wages, the union
was allowed to negotiate benefit packages on behalf of workers as
well. This ruling, affirmed later by the U.S. Supreme Court, further
reinforced the employment-based system.5

Perhaps the most influential aspect of government intervention that
shaped the employer-based system of health insurance was the tax
treatment of employer-provided contributions to employee health
insurance plans. First, employers did not have to pay payroll tax on
their contributions to employee health plans. Further, under certain
circumstances, employees did not have to pay income tax on their
employer's contributions to their health insurance plans. The first
such exclusion occurred under an administrative ruling handed down in
1943 which stated that payments made by the employer directly to
commercial insurance companies for group medical and hospitalization
premiums of employees were not taxable as employee income (Yale Law
Journal, 1954, pp. 222-247). While this particular ruling was highly
restrictive and limited in its applicability, it was codified and
extended in 1954. Under the 1954 Internal Revenue Code (IRC), employer
contributions to employee health plans were exempt from employee
taxable income. As a result of this tax-advantaged form of
compensation, the demand for health insurance further increased
throughout the 1950s (Thomasson 2003).

The 1960s: Medicare and Medicaid
--------------------------------

The AMA and the Defeat of Government Insurance before 1960

By the 1960s, the system of private health insurance in the United
States was well established. In 1958, nearly 75 percent of Americans
had some form of private health insurance coverage. By helping to
implement a successful system of voluntary health insurance plans, the
medical profession had staved off the government intervention and
nationalized insurance that it had feared since the 1910s. In addition
to ensuring that private citizens had access to voluntary coverage,
the AMA also was a vocal opponent of any nationalized health insurance
programs, suggesting that such proposals were socialistic and would
interfere with physician income and the doctor-patient relationship.
The AMA had played a significant role in defeating proposals for
nationalized health insurance in 1935 (under the Social Security Act)
and later in defeating the proposed Murray-Wagner-Dingell (MWD) bill
in 1949. The MWD bill would have provided comprehensive nationalized
health insurance to all Americans. To ensure the defeat of the
proposal, the AMA charged every physician who was a member $25 for
their lobbying efforts (Marmor 2000).

While serious proposals for government-sponsored health insurance were
not put forth during the Eisenhower Administrations of 1952-1960,
proponents of such legislation worked to ensure that their ideas would
have a chance at passing in the future under more responsive
administrations. They realized that the only way to enact
government-sponsored health insurance would be to do so incrementally
-- and they began by focusing on the elderly (Marmor 2000).

Offering insurance to aged persons age 65 and over provided a means to
successfully counter several criticisms that opponents to
government-sponsored health insurance had aimed at previous bills.
Focusing on the elderly allowed proponents to counter charges that
nationalized health insurance would provide health care to individuals
who were generally able to pay for it themselves. It was difficult for
opponents to argue that the elderly were not among the most medically
needy in society, given their fixed incomes and the fact that they
were generally in poorer health and in greater need of medical care.
Supporters also tried to limit the opposition of the AMA by putting
forth proposals that only covered hospital services, which also
stemmed criticism that said nationalized health insurance would
encourage extensive -- and unnecessary -- utilization of medical
services.

Medicare Provisions

The political atmosphere become much more favorable towards
nationalized health insurance proposals after John F. Kennedy was
elected to office in 1960, and especially when the Democrats won a
majority in Congress in 1964. Passed in 1965, Medicare was a federal
program with uniform standards that consisted of two parts. Part A
represented the compulsory hospital insurance program the aged were
automatically enrolled in upon reaching age 65. Part B provided
supplemental medical insurance, or subsidized insurance for
physicians' services. Ironically, physicians stood to benefit
tremendously from Medicare. Fearing that physicians would refuse to
treat Medicare patients, legislators agreed to reimburse physicians
according to their "usual, customary, and reasonable rate." In
addition, doctors could bill patients directly, so that patients had
to be reimbursed by Medicare. Thus, doctors were still permitted to
price discriminate by charging patients more than what the program
would pay, and forcing patients to pay the difference. Funding for
Medicare comes from payroll taxes, income taxes, trust fund interest,
and enrollee premiums for Part B. Medicare has grown from serving 19.1
million recipients in 1966 to 39.5 million in 1999 (Henderson 2002, p.
425).

Medicaid

In contrast to Medicare, Medicaid was enacted as a means-tested,
federal-state program to provide medical resources for the indigent.
The federal portion of a state's Medicaid payments is based on each
state's per capita income relative to national per capita income.
Unlike Medicare, which has uniform national benefits and eligibility
standards, the federal government only specifies minimum standards for
Medicaid; each of the states is responsible for determining
eligibility and benefits within these broad guidelines. Thus, benefits
and eligibility vary widely across states. While the original
legislation provided coverage for recipients of public assistance,
legislative changes have expanded the scope of benefits and
beneficiaries (Gruber 2000). In 1966, Medicaid provided benefits for
10 million recipients. By 1999, 37.5 million people received care
under Medicaid (Henderson 2002, p. 433).

Growth of Medicare and Medicaid Expenditures
Figure 3 shows how Medicare and Medicaid expenditures have grown as a
percentage of total national health care expenditures since their
inception in 1966. The figure points to some interesting trends.
Expenditures in both programs rose dramatically in the late 1960s as
the programs began to gear up. Then, Medicare expenditures in
particular rose sharply during the 1970. This growth in Medicare
expenditures resulted in a major change in Medicare reimbursement
policies in 1983. Instead of reimbursing according to the "usual and
customary" rates, the government enacted a prospective payment system
where providers were reimbursed according to set fee schedules based
on diagnosis. Medicaid expenditures were fairly constant over the
1970s and 1980s, and did not begin to rise until more generous
eligibility requirements were implemented in the 1990s. By 2001,
Medicare and Medicaid together accounted for 32 percent of all health
care expenditures in the U.S.

Figure 3:

Medicare and Medicaid as a Share of National Health Expenditures,
1966-2001

 

Source: Calculations by author based on data from the Centers for
Medicare and Medicaid Services (http://cms.gov).

Notes: Percentages are calculated from price-adjusted data for all
consumer expenditures, 1996=100.

Endnotes

1. In Canada, fraternal societies were the primary source of sickness benefits and access to a physician in the event of illness. The role of fraternal lodges in insurance declined significantly after 1929. See Emery 1996 and Emery and Emery 1999.

1. These changes may also have increased physician quality, thus leading to an increase in demand for physicians' services that put additional pressure on prices.

1. Stock companies are companies that are owned by stockholders and who are entitled to the earnings of the company. Stock companies are required to hold reserves to guard against insolvency (see Faulkner
2. 960, pp. 406-29 for a detailed discussion on reserves). Mutual companies are cooperative organizations in which the control of the company and its ownership rest with the insureds. Mutual companies may be required to have reserves, or to engage in assessment liability (in which insureds must pay additional amounts if premiums fall short of claims). Both stock and mutual companies pay taxes.

1. However, the enabling legislation did not give the Blue Cross plans free rein. They required the plans to be non-profit, and to allow free choice of physician by subscribers, and some specified additional requirements. New York was the first state to enact such enabling legislation in 1934, and 32 states had adopted special enabling legislation for hospital service plans by 1943. Other states exempted Blue Cross plans by categorizing them strictly as nonprofit organizations (Eilers 1963, pp. 100-07).

1. Scofea, p. 6. See also Inland Steel Co. v. NLRB (170 F. 2d 247 (7th Cir. 1948) and Eilers, p. 19.

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Citation: Thomasson, Melissa. "Health Insurance in the United States".
EH.Net Encyclopedia, edited by Robert Whaples. April 17, 2003. URL
http://eh.net/encyclopedia/article/thomasson.insurance.health.us

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