February 22, 2025

History of Healthcare Insurance in the U.S.

John Dang M.D.

U.S. private healthcare insurance companies arose organically from local hospitals and physician groups in the early 1900’s. During and after World War II, the demand for healthcare insurance by working adults was increasingly met by employers, who purchased medical healthcare plans on their employee’s behalf as part of employee benefits.

In the 1960’s, the U.S. government became an active participant in the U.S. healthcare insurance market, with the development of Medicare and Medicaid programs. Medicare provides healthcare insurance for seniors ages 65 and above; Medicaid (funding provided by federal government, administration provided by each state government) provides healthcare insurance for low-income families. It should be noted the U.S. is not in direct competition with private healthcare insurance companies since they service different segments of the population.

The latter half of the 20^th century saw rising costs (with increasing administrative costs, aging U.S. population, rising rates of chronic medical conditions, and more expensive diagnostic and treatment modalities), leading to acquisitions and mergers of healthcare insurance companies, and the development of managed care (HMO and PPO plans) as a means of controlling high healthcare costs.

In the early 2000’s, the passage of the Affordable Care Act (ACA) by President Obama expanded healthcare insurance to the entire U.S. population, mostly through expanding coverage via Medicaid and private healthcare insurance companies. 

1. Historically the U.S. healthcare insurance industry developed from individual companies, meaning the industry is organically developed, with no strong government presence to help direct or shape the direction that the industry takes.
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2. The healthcare insurance industry is fragmented and will likely remain so in the near future, with a portion of it administered by the government, both federal and state, and the remaining market share administered by an oligopoly.
   
   
3. The oligopoly, as caused by mergers and consolidations in the 80’s, 90’s, and 2000’s, means that there are now only a few healthcare insurance companies, not representing true market competitiveness. This can only mean increased healthcare costs for patients. This trend is likely to continue, not necessarily by further mergers (as the U.S. government may enact anti-trust statutes to prevent further consolidation), but by vertical integration, where hospitals, healthcare networks, pharmacy benefit managers, are now acquired by insurance companies.

If healthcare insurance is increasingly more expensive and controlled by large for profit companies, why have it at all?

One of the leading causes of bankruptcy in the U.S. is due to healthcare associated fees. Furthermore, the truly high-cost areas of healthcare (hospitalizations, surgeries, emergency visits, certain drugs) cannot be predicted or anticipated. Healthcare insurance is an insurance against catastrophic costs.

Insurance companies do indeed work for their patients and are able to negotiate better rates for their members. Insurance companies are able to do is to set an upper cap for  fees charged by healthcare facilities, namely through PPO and HMO plans. 

Usually free annual physical, routine blood tests, immunizations, as well as other costs, such as imaging and procedures.