A Short History of American Medical Insurance

A number of interesting points:

Perhaps the most astonishing thing about modern medicine is just how very modern it is. More than 90 percent of the medicine being practiced today did not exist in 1950. Two centuries ago medicine was still an art, not a science at all. As recently as the 1920s, long after the birth of modern medicine, there was usually little the medical profession could do, once disease set in, other than alleviate some of the symptoms and let nature take its course. It was the patient’s immune system that cured him—or that didn’t.

It was only around 1930 that the power of the doctor to cure and ameliorate disease began to increase substantially, and that power has continued to grow nearly exponentially ever since. This new power to extend life, interacting with the deepest instinctual impulse of all living things—to stay alive—has had consequences that our society is only beginning to comprehend and address. Since ancient times, for example, doctors have fought death with all the power at their disposal and for as long as life remained. Today, the power to heal has become so mighty that we increasingly have the technical means to extend indefinitely the shadow, while often not the substance, of life. When doctors should cease their efforts and allow death to have its inevitable victory is an issue that will not soon be settled, but it cannot be much longer evaded.


Although called insurance, these hospital plans were unlike any other insurance policies. Previously, insurance had always been used to protect only against large, unforeseeable losses, and came with a deductible. But the first hospital plans didn’t work that way. Instead of protecting against catastrophe, they paid all costs up to a certain limit. The reason, of course, is that they were instituted not by insurance companies, but by hospitals, and were primarily designed to generate steady demand for hospital services and guarantee a regular cash flow.


A far better and cheaper alternative would be to reform the economics of the present system.

The most important thing to do, by far, is to require medical service providers to make public their inclusive prices for all procedures. Most hospitals keep their prices hidden in order to charge more when they can, such as with the uninsured. But some facilities do post their prices. The Surgery Center of Oklahoma, for instance, does so on its website. A knee replacement there will cost you $15,499, a mastectomy $6,505, a rotator cuff repair $8,260.

Once prices are known and can be compared, competition—capitalism’s secret weapon—will immediately drive prices towards the low end, draining hundreds of billions of dollars in excess charges out of the system. Posting prices will also force hospitals to become more efficient and innovative, in order to stay competitive.

Any politician who pontificates about reforming health care without talking about making prices public is carrying water for one or more of the powerful lobbyists that have stymied real reform, such as the American Hospital Association, the American Medical Association, and the health workers unions.

Second, we should reform how malpractice is handled. We should get rid of the so-called American rule, where both sides pay their own legal expenses regardless of outcome, and adopt the English rule—employed in the rest of the common-law world—where the loser pays the expenses of both sides.

Third, we need to ensure that the consumers of medical care—you and me—care about the cost of medical care. Getting patients to shop for lower-cost services is vital.

A generous health insurance policy more or less covers everything from a sniffle to a heart transplant. It shouldn’t. An insurance policy that covers routine care isn’t even an insurance policy, properly speaking—it is a very expensive pre-payment plan that jacks up premiums. Just as oil changes are not covered by automobile insurance, annual flu shots and scraped knees should not be covered by medical insurance. One way to achieve this would be for employers to provide major medical insurance plus a health savings account to take care of routine health care. If the money in the account is not spent on health care, it would be rolled over into the employee’s 401(k) account at the end of the year, giving him an incentive to shop wisely for routine medical care.