Health Insurance

• Author: Jeffrey Lehman, Shirelle Phelps

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Health insurance originated in the Blue Cross system that was developed between hospitals and schoolteachers in Dallas in 1929. Blue Cross covered a pre-set amount of hospitalization costs for a flat monthly premium and set its rates according to a "community rating" system: Single people paid one flat rate, families another flat rate, and the economic risk of high hospitalization bills was spread throughout the whole employee group. The only requirement for participation by an employer was that all employees, whether sick or healthy, had to join, again spreading the risk over the whole group. Blue Shield was developed following the same plan to cover ambulatory (i.e., non-hospital) medical care.

The Blue Cross/Blue Shield plans were developed to complement the traditional method of paying for HEALTH CARE, often called fee-for-service. Under this method, a physician charges a patient directly for services rendered, and the patient is legally responsible for payment. The Blue Cross/Blue Shield plans are called indemnity plans, meaning they reimburse the patient for medical expenses incurred. Indemnity insurers are not responsible directly to physicians for payment, although physicians typically submit claims information to the insurers as a convenience for their patients. For insured patients in the fee-for-service system, two contracts are created: one between the doctor and the patient, and one between the patient and the insurance company.

Traditional property and casualty insurance companies did not offer health insurance because with traditional rate structures, the risks were great and the returns uncertain. After the Blue Cross/Blue Shield plans were developed, however, the traditional insurers noted the community rating practices and realized that they could enter the market and attract the healthier community members with lower rates than the community rates. By introducing health screening to identify the healthier individuals, and offering lower rates to younger individuals, these companies were able to lure lower-risk populations to their health plans. This left the Blue Cross/Blue Shield plans with the highest-risk and costliest population to insure. Eventually, the Blue Cross/Blue Shield plans also began using risk-segregation policies and charged higher-risk groups higher premiums.

During the 1960s, Congress enacted the MEDICARE program to cover health care costs of older patients and MEDICAID to cover health care costs of indigent patients (Pub. L. No. 81-97). The federal government administers the Medicare Program and its components: Part A, which covers hospitalization, and Part B, which covers physician and outpatient services. The federal government helps the states fund the Medicaid Program, and the states administer it. Medicare, Part A, initially covered 100 percent of hospitalization costs, and Medicare, Part B, covered 80 percent of the usual, customary, and reasonable costs of physician and outpatient care.

Under both the fee-for-service system of health care delivery, where private indemnity insurers charge premiums and pay the bills, and the Medicare-Medicaid system, where taxes

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fund the programs and the government pays the bills, the relationship between the patient and the doctor remains distinct. Neither the doctor nor the patient is concerned about the cost of various medical procedures involved...