Oops! Look America, We Accidentally Made a Healthcare System!

The following is adapted from Broken, Bankrupt, and Dying.

If you’ve ever looked at an insurance bill, you know that there are a lot of things about American healthcare that don’t make sense. 

Why does a single pill cost $400? 

Why did going to one doctor cost $50 and going to another cost $1,000?

Why did you have to pay a copay and coinsurance? Actually, what is coinsurance in the first place? 

On a more general level, why are Americans spending so much more private money on healthcare than other countries? Money to the tune of $1.8 trillion dollars a year?

One of the main reasons is that our healthcare system was never purposefully designed to deliver healthcare. It was a complete accident. Oops! 

No, really. It’s true. The healthcare system we have now is complex and fragmented, due in large part to the complexity and fragmentation of insurance. Employers are in charge of their employees’ care, every plan is different, and the nuances are almost impossible to understand.  

This arcane, confusing system was an accidental outgrowth of efforts to combat post-World War II inflation. Let me show you what I mean.

The Origins of the Current US Healthcare System

To understand the origins of the current US healthcare system, we must go back in time to World War I. World War I resulted in the conscription of more than 4 million Americans into military service, accounting for nearly 4 percent of the total population. 

This massive conscription of young adults led to a very tight labor market and a shortage of goods and supplies in society. To prevent inflation, strict government controls were put in place on the prices of goods sold in the US.

When the war ended, those price controls were lifted, and conscripted Americans rejoined the labor force. So began an upward spiral of employees’ salaries and wages along with the prices of goods and services.

This led to a huge inflationary spike. US inflation hit 15 percent between 1919 and 1920. That inflation led to economic turmoil, and ultimately to labor strife, including large, national union strikes, which were highly disruptive to the US economy and society. This chaos and disruption left a traumatic imprint on those who lived through it. 

Twenty years later, the US geared up to enter World War II. But this time, the US government was determined to prevent a recurrence of the post-war inflationary spike.

In 1942, President Roosevelt and Congress passed the Stabilization Act to try to head off post-war inflation. Instead of just fixing the prices of goods and services, the Stabilization Act authorized the president to also fix salaries and wages. He then entrusted oversight of this process to the War Labor Board.

Since salaries and wages were frozen by the War Labor Board, companies struggling in a tight labor market to compete for hiring workers could not simply escalate pay to convince employees to work for them instead of their competitors. They had to find other ways to lure employees, aside from raising salaries and wages.

One of the biggest perks was insurance. 

The Rise of Insurance

The first form of American “health insurance” appeared alongside the railroads. However, the scale of these “health plans” was minimal. In the nineteenth century, there weren’t a lot of effective disease-treatment drugs, and preventative care was unheard of. 

As medical care advanced over the course of the twentieth century, more employers started offering health insurance. The retail giant Montgomery Ward offered a form of health insurance policy to its employees in 1910. In 1932, a conglomerate of hospitals and doctors formed Blue Cross of Sacramento, and in 1939, the Kaiser Foundation Medical Plan was set up.

Still, these health insurance offerings remained sporadic, not widespread. That changed in 1943, when the War Labor Board ruled that insurance and pension funds were exempt from the law. Companies immediately began to improve their benefit packages to lure new hires.

The coup de grace was then delivered by the IRS, which also ruled that premiums spent on health insurance were tax deductible for the worker. Workers were delighted to be hired by companies that had developed benefit packages enabling the employees to receive both health insurance and a tax deduction. 

The existing insurance infrastructure in the US rapidly took note of these developments. It aggressively began to create and push health insurance plans that companies could add to their benefits packages in the frenzied competition to hire workers.

The age of insurance had arrived.

The Revenue Act Fed the Frenzy 

Another Congressional Act in 1942 further fed the frenzy. The Revenue Act was critical to the US government’s efforts to raise money to fight the war. It markedly increased income tax rates, up to 90 percent for top individual earners, and also increased the corporate tax rate to 40 percent while adding a flat 90 percent corporate tax for “excess profits.” 

Companies slammed by higher corporate and excess profit taxes quite naturally began to explore and exploit any loopholes they could find to reduce their tax burden. They quickly found one. One of the few new tax deductions created by the Revenue Act was a deduction for medical and dental expenses. 

The hiring companies would purchase the insurance to cover all of their employees, funding the costs via payroll deductions. Thus, the insurance was funded via salary and wage contributions from both the employer and workers, both of which then received tax deductions. That’s why we continue to this day to fund health insurance for individual people by partial payment from the employer and partial payment from the employee.

Workers covered by these employer-sponsored health insurance mechanisms increased more than eightfold within four years. Within another decade, workers covered by employer-sponsored health insurance had increased by a further tenfold, to 90 million. Soon, every aspect of US healthcare—from treatment to billing—reoriented around a baffling labyrinth of employer-sponsored policies. The American healthcare system had been established.

The change in American business culture was profound and long-lasting. Long after the War Labor Board was disbanded at the end of World War II, employee benefits had come to be viewed as an expected component of employee hiring packages. 

In 2020, more than 150 million Americans receive health insurance from their employer, funded by a combination of employer and employee contributions to the insurance premium, and employee payments for deductibles, co-pays, and other gaps in coverage. 

As a result, the US spends far more private dollars than any other country in the world to pay for health insurance.

An Accidental System

When you step back from it all and look at the big picture, you have to wonder. The healthcare system in the US is an accidental outgrowth of a series of unrelated phenomena from nearly a century ago that had nothing to do with healthcare. 

It had to do with getting ready to go to war, preventing economic inflation, changes to tax codes, and expected resulting business opportunism. Our healthcare system is an accidental byproduct of history, not a rationally planned enterprise designed to deliver the services we need to be delivered and at a cost we find acceptable.

So here’s the question we need to ask. Why do we expect an accidental system to function in an optimal way to deliver the best healthcare possible at the most affordable price?

That’s nonsense.

The US healthcare system needs to be redesigned. Or rather, it needs to be designed in the first place.

For more advice on the history of healthcare, you can find Broken, Bankrupt, and Dying on Amazon.

Dr. Brad Spellberg is chief medical officer at the Los Angeles County + University of Southern California Medical Center, and the associate dean for clinical affairs at the Keck School of Medicine at USC. Internationally respected as an expert in Infectious Diseases and Internal Medicine, Dr. Spellberg has authored more than two hundred scientific publications, including his award-winning Rising Plague, named Outstanding Academic Title in 2009 by Choice magazine. Dr. Spellberg is also prominently featured in the documentary film, Resistance, and in the PBS Frontline episode, “Hunting the Nightmare Bacteria.”