Why did private health insurance begin?

Dr. Michael Roizen, MD
Internal Medicine

The first ever health insurance plans were sold during the Civil War, mostly covering accidents related to travel (by boat or train, of course). The first group policy providing more extensive coverage was created in Massachusetts in 1847 and illness policies for individuals were sold starting in 1890.

In the 1920s you can find the true grandmother or grandfather of the private health insurance plans we know (and love/hate) today. These plans from the 1920s provided coverage for up to 21 days of hospital care, room, and board (not private rooms, but wards of 20-30 patients in a large room) for a monthly fee of…$6 (that’s the same as about $200 now). Eventually hospital insurance evolved into all the different types we have today.

Stanley C. Newhall, MD
General Practice
Health insurance was originally sold before the Civil War as a protection against a worker's disability, because medical care was relatively ineffective.  As medical care became more effective and expensive, people saw a need to "pool" their money so that everyone could be equally protected against being stricken with illness or injury. Before WWI, the AMA supported a national health insurance program to give health insurance to all but soon reversed its position because of feared loss of physician income and influence.  During the Depression, FDR's administration twice considered national health insurance but could not advance it over the objections of the AMA and the growing private health insurance industry.
With wage controls in the 40's, employers who could not offer higher wages gave health insurance instead.  Health insurance was tax-deductible to the employer and tax free to the employee, leading to the rapid growth of private health insurance plans.
Eventually, insurance companies saw that their profits suffered if they insured people who were likely to become ill.  Insurers then turned from a model of covering everyone to a model of discrimination, and companies prospered when they were able to avoid paying the medical bills of people who became ill.  The industry developed a plethora of ingenious mechanisms for reducing "medical losses", as the cost of medical care is called.  These included enlisting the Federal Government in taking over the largest share of the national health care costs, by covering the (typically less healthy) elderly and poor through Medicare and Medicaid.
Today, we have a fragmented system of over 1200 private insurance companies, paying about 40% of the national health care bill of $2.4 trillion dollars annually.  The Federal and state governments pay the remaining 60% of the national health care bill, through Medicare, Medicaid, Veteran's Administration and various other national health programs.  Despite the high price tag of medical care, the highest in the world, the US is ranked 37th (just above Cuba) in health care quality when compared with other nations.  This is largely due to the poor health care of the 50 million people lacking insurance and the 50 million others with private health insurance that costs too much and offers too little.

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Important: This content reflects information from various individuals and organizations and may offer alternative or opposing points of view. It should not be used for medical advice, diagnosis or treatment. As always, you should consult with your healthcare provider about your specific health needs.