HJNO Mar/Apr 2025

WHAT’S WRONG WITH HEALTHCARE 36 MAR / APR 2025 I  HEALTHCARE JOURNAL OF NEW ORLEANS   to the emergency room for a blood transfusion. Is this transfusion a need or a luxury? Whereas the purchase of wireless earbuds was a choice, the need for and the cost of healthcare services are unpredictable. Most people do not know when they may become ill or severely injured. It’s one thing to save up enough money to buy the latest technology gadget, but quite anoth- er to pay for an unanticipated and unpredict- able hospitalization or emergency room visit. In addition to differentiating need versus luxury, we also need to appreciate asymmetry of information flow. While we can find abun- dant information on which earbuds best meet our desired set of expectations for the dollars we are willing to spend, discriminating among the options of what a doctor recommends is quite different. A person lying in a hospital gurney suffering from excruciating abdominal pain who is advised that they need a CT scan of their abdomen and possibly surgery is in little position to evaluate whether these healthcare services best fulfill their desired set of expecta- tions for the money they are willing to spend. Health insurance came about as a way to temper this conflict between need and luxury and the unpredictability of need. The world’s first health insurance model was introduced in 1883 by the German Chancellor Otto von Bismarck. The guiding principle of this Ger- man health system was solidarity among the insured. Solidarity manifested itself in that ev- eryone became insured, irrespective of health risk, contributing a percentage of their income to a set of pooled funds. These contributions then entitled the insured individuals to “ben- efits according to health needs — irrespective of their socioeconomic situation, ability to pay, or geographical location. In this pooled-risk system, people with high income support peo- ple with low income, young people support elderly people, healthy people support people who are sick, and people without children sup- port people with children.” In other words, it reflected a societal view that we are all in this together, that healthcare is a shared need, and that since we cannot guard against unpredict- ability of risk — not knowing which one among us will become ill or injured or when that might happen — that society should pool resources to pay for care when and if one of us needs it. 1920s to 1960s Health insurance in the United States came about a little differently. The development of private health insurance in the U.S. was essen- tially a product of both increasing effectiveness and rising costs of healthcare. As the new era of modern medicine led to increased effective- ness of care, hospitals transformed from places where people mostly went to die into places where they could also heal and get well. How- ever, many patients were unable to pay for hos- pital care. In an effort to secure payments to deliver care, Baylor University Hospital in Dal- las played a pivotal role in the development of health insurance in the U.S. by becoming the first hospital to offer private health insurance in 1929. The hospital, facing financial challenges due to a growing number of patients unable to afford medical care, partnered with a group of local employers and the hospital’s staff to cre- ate a plan that allowed people to pay a small monthly fee in exchange for coverage of hos- pital expenses. This innovative model aimed to provide more accessible care to the com- munity, while also ensuring hospitals received timely payments. This idea of prepaying for medical services would later evolve into Blue Cross, our country’s first national health insur- ance system that subsequently expanded across the country. The success of Baylor’s plan laid the groundwork for the creation of Blue Cross plans in other regions, fundamen- tally changing the way healthcare was financed in the U.S. and marking the beginning of the modern health insurance industry. A decade later, the Great Depression had also reduced the amount that patients could pay physicians out of pocket, and in 1939, the California Medi- cal Association set up the first Blue Shield plan to cover payment for physician services. So, those hospitals and physicians who complain incessantly about health insurers would do well to remember that health insurance in the U.S. arose out of efforts to secure payments for their services. Blue Cross and Blue Shield would eventually merge their operations to become a unified entity several decades later. Arising as a direct result of the failure of out- of-pocket payment as a method of healthcare financing, health insurance evolved to provide a mechanism to distribute healthcare more in accordance with human need rather than ex- clusively relying on the ability of someone to pay. However, contingent within this mecha- nism of healthcare financing is not just “dis- tribution,” but also “redistribution.” What do I mean by that? If health insurance distributes payments in accordance with need rather than ability to pay, then implicit within that distribu- tion is the understanding that some healthy people will pay dollars into a pool that they may not ultimately need anytime soon. In other words, dollars are being redistributed from healthy people who do not immediately need healthcare to sick or injured people who do. So, how should we, as a society, determine how much each person should contribute? The first private insurers, Blue Cross and Blue Shield, chose a method called community rat- ing where everybody contributed the same amount regardless of their own personal risk. For mathematical simplicity, let’s suppose that we have three health plan members with three varying levels of health-related risks: low, me- dium, and high. Let’s further suppose that the health plan actuaries have determined that the plan needs to collect a total of $36,000 per year from these three members to cover all the healthcare-related expenses for these three members. In this case, all three members are paying the same exact premium of $1000 per month: $1000 per member x 12 months x 3 members = $36,000. Now, invariably, someone might be thinking “that isn’t fair.” Why should someone who works hard to stay healthy by exercising regularly and eating a heathy diet have to pay for someone who smokes, drinks excessively, doesn’t exercise, and eats poorly? This concept of “fairness” and redis- tribution is a complex and nuanced topic that we will be exploring more in the next article. Before we can get into a discussion about whether redistribution of healthcare dollars from young and healthy to older and sicklier is fair or not, we first need to understand how health insurance became tied to employment in this country. Employment-based health in- surance was essentially an accident of history. Remember that Blue Cross and Blue Shield plans emerged in the 1930s. In the 1940s, during World War II, wage and price controls prevented companies from granting wage in-