Published: October 23, 2023

How Did We Get Here?

Value-based care is here to stay.

Mary T. Mitskavich, MD, for the Otolaryngology Private Practice Section

Mary T. Mitskavich, MDMary T. Mitskavich, MDThe early settlers did not come to America carrying a Medicare card.

How did we get to our current healthcare system? The history of that evolution is fascinating. In the interest of brevity, let’s start with the 1930s.

The first true modern hospital healthcare plan was formed in 1929 by a Baylor hospital vice president who noted that teachers weren’t paying their bills. With the depression looming and the hospital occupancy down, he came up with a plan to offer teachers 21 days of free hospital care for $6.00 per year. Previously the patients were billed directly for all services provided. The concept prospered among other groups of workers and hospitals.  

Eventually, hospitals began competing against each other for the lowest price. The American Hospital Association stepped in to help create guidelines. This organization of hospitals was called Blue Cross. 

It’s important to note that these initial plans did not come from insurance companies but were rather a nonprofit association between hospitals. The nonprofit status provided a tax advantage. The insured could go to any member hospital. Everyone paid the same premium, sick or healthy.

Physicians were reluctant to join this market. They enjoyed a fee-for-service reimbursement with a sliding scale based on the private patient’s ability to pay. The patients paid for care when they needed it. The rich paid more.

Doctors eventually realized that Blue Cross plans might endanger their personal practices by negotiating doctors’ fees. Thus, the American Medical Association (AMA) established a similar nonprofit entity known as Blue Shield in 1939. It stipulated that hospital and medical insurance would be separate. Physicians were paid directly and payments were physician controlled. Membership ensured benefits during hospitalization and sometimes for office visits. Choice of physician was still a major point of the plan. Unlike Blue Cross, Blue Shield did not always guarantee complete payment for services, but the two services still operated as nonprofit organizations generally with a good relationship between health providers and with patients in mind.

With the success of Blue Cross and Blue Shield, the “disability“ insurance companies realized there was a safe market for health insurance. But they had a couple advantages over Blue Cross and Blue Shield: (1) they weren’t restricted by nonprofit regulations, and (2) they had professional actuaries.

With their actuarial expertise and less regulations, commercial insurance companies could offer targeted rates, higher for sick and older people, less for healthy and younger people. They could also target group rates for corporations—larger companies tended to have a greater percentage of young workers so they could offer much lower rates.

Blue Cross and Blue Shield had difficulty competing. Their commitment to provide coverage to all under standard rates was undercut by the targeted rates of insurance companies. By about 1950, commercial companies had a higher insurance enrollment than they did. Ultimately, Blue Cross and Blue Shield ended up, for the most part, as just another for-profit insurer.  

The United States employer sponsored insurance model, unlike any health plans abroad, was spawned by government regulation.

In the wake of World War II, President Franklin Delano Roosevelt (FDR) passed an executive order in 1942. It allowed employers to provide health insurance and pensions as a “benefit” that did not fall under the existing nationwide wage and price freezes in effect. The wage freeze was in effect because the labor market was tight due to increased demand for goods and decreased supply of workers during the war. FDR’s executive order allowed employers to entice workers with benefits.

In 1954 the Internal Revenue Service (IRD) officially made the benefit tax exempt for employers and employees providing the single biggest tax benefit of all time. Workers and employers will forever resist any change. Employer-sponsored insurance plans proliferated. Public sector employers followed suit in an effort to compete. Between 1940 and 1960, the total number of people enrolled in health insurance plans grew seven-fold in that 75% of Americans had some form of health coverage.

The poor, the unemployed, and older Americans found themselves unable to afford the ever-increasing cost of healthcare. They had to depend on public or private charity. Enter Medicare and Medicaid in 1965.

Medicare and Medicaid recognized the right of the aged and the poor to have standard medical treatment. To appease the AMA, physician payment was based on a local calculation of a “customary, prevailing, and reasonable” fee. However, doctors did not have to accept Medicare’s fee as payment in full for any individual patient. The rate of increase in doctors’ fees doubled. The net income of nonprofit hospitals shot up 76% between 1965 and 1969. The government was billed a much higher rate than the commercial insurers.

Due to our, dare I say, greed, the alphabet soup of government regulation started. Enter HMOs, DRGs, RVUs, PQRS, SGR, MACRA, and the No Surprises Act to mention a few. Currently we live under MACRA, which is a move to value-based versus volume-based care.

What does our future hold? Value-based care is here to stay. The healthcare industry is becoming increasing data driven and will dictate our future. Artificial intelligence and machine learning will continue to be applied to healthcare data. Efforts to expand healthcare access and reduce disparities are likely to continue. Policymakers and stakeholders will continue to seek ways to control costs, which will involve price transparency, drug price regulation, nonphysician providers, and other measures.

The only certainties are change as the current trajectory of healthcare spending is unsustainable.