Since the mid-20th century, the health insurance model in the United States has become more and more complex. However, the nation’s first health insurance plans, dating back to a prepaid hospital care program created at Baylor University Hospital in 1929, were simple in design.
Under the Baylor Plan, more than 1,300 Dallas-area school teachers could pay 50 cents a month to receive 21 days of hospital care. Amid the Great Depression, it was a win-win situation for the teachers struggling to afford these services, and for the hospital, which faced financial hardships. The program was a success, and other hospitals began following suit and launching their own plans.
In efforts led by the American Hospital Association (AHA), these programs morphed into Blue Cross plans that provided coverage at all the hospitals in a given community. Then, following a similar model, what became known as Blue Shield plans began covering physician services, such as doctor’s visits. Eventually, these nonprofit plans started facing greater competition from for-profit health insurance companies. Time and time again, rising insurance costs stirred debate and spurred reform efforts in the United States.
“The Baylor Plan really met a basic human need and created a principle that we’re still basically following today,” says Samuel Schaal, author of Lone Star Legacy: The Birth of Group Hospitalization and the Story of Blue Cross and Blue Shield of Texas.
Early 20th-Century Health Care
By the late 19th and early 20th centuries, medicine was advancing with the rise of new vaccines, X-rays, surgical anesthesia, and other innovations. The newfound germ theory was transforming our understanding of how diseases spread, and the medical community was working to improve hospital conditions. Surgeries began yielding better outcomes.
Hospitals, once places where the poor went to die, began appealing to middle-class and wealthy people who could undergo medical procedures. In the early 1900s, many hospitals were funded largely by donations along with patient fees. Pay-as-you-go models, however, became more problematic as health care became more expensive.
Before 1929, life insurance was already fairly common. And businesses and the medical community were experimenting with different types of health care prepayment plans. Some multi-speciality doctor groups set up systems where patients would pay a monthly fee for care. “Fraternal societies” (or mutual aid societies) also offered health care benefits to members, who paid dues. In addition, labor unions and businesses created “industrial sickness funds” to provide payments to employees who were unable to work due to sickness or injury.
Baylor Plan to Blue Cross
Ultimately, it was the Baylor Plan model that really gained momentum. The program was largely the brainchild of Justin Ford Kimball, vice president of the hospital and medical schools at Baylor University. The school hired Kimball, an educator and businessman, in June 1929 to help improve its financial situation.
After teacher Alma Dickson became the first patient to use the plan when seeking treatment for an ankle injury, “Teachers were astounded, and it increased enrollment,” Schaal says. “It was a very successful plan.” By December 1929, three-quarters of Dallas teachers had enrolled, according to the Texas State Historical Association.
In the early 1930s, the Baylor Plan inspired the creation of similar “hospital service plans” in other cities and industries. Soon, a new insurance model began providing coverage at all hospitals in a community, rather than a single hospital. Eventually, the American Hospital Association would only authorize these community-wide plans, largely to reduce competition among neighboring hospitals.
“The Baylor Plan, per se, sort of disappeared over time as these community ones took over,” says Michael Morrisey, professor emeritus of health economics at the University of Alabama at Birmingham and author of the three published editions of Health Insurance. The AHA established the nonprofit Blue Cross Commission in 1946 to oversee what became known as Blue Cross plans.
Blue Shield: Opposition to Acceptance
The Baylor Plan and then Blue Cross only covered hospital care. As demand for coverage of other medical services rose, the American Medical Association (AMA) and many physicians became suspicious of prepaid plans. For one thing, they largely opposed federal government efforts to reform health care, which started happening in the 1930s, particularly under President Harry Truman.
In addition, “This is the period of the rise of the large corporation,” says Christy Ford Chapin, associate professor of history at the University of Maryland, Baltimore County and author of Ensuring America’s Health: The Public Creation of the Corporate Health Care System. Many in the medical community feared increased competition among doctors and didn’t want to bow to insurance company supervision and cost control.
But, facing political pressure, the AMA began seriously considering prepaid medical plans. By the early 1940s, what became known as Blue Shield plans were becoming more popular for physician services, as companions to Blue Cross plans (for hospital services).
Growth of Employer-Based Health Insurance
Health insurance gained popularity in the 1940s, in part due to the growth of employer-based insurance benefits during and after World War II. The federal government had set employer wage controls to help stave off inflation during wartime—but they didn’t consider health insurance a wage. So, employers could compete for scarce labor by offering employees health care.
Plus, the Internal Revenue Service (IRS) issued a ruling that exempted employer-sponsored health insurance from federal income taxation. And labor unions began pushing for employer funding of employee health benefits. By the end of World War II, nearly a quarter of the population had health insurance. By 1950, nearly half the population was covered.
“That’s when you start seeing health care costs shooting up way above anything else,” Chapin says. “And they never come back down.”
Evolution of Health Insurance in the U.S.
Nearly 80 percent of the population had health insurance by 1965. That year, following other legislative reform efforts, President Lyndon B. Johnson signed the Medicare and Medicaid Act, creating insurance programs for the elderly and people with limited income.
Around this time also came the proliferation of commercial health insurance providers. To control costs in the 1980s, many insurers began more commonly offering both conventional coverage as well as managed care plans, including HMO, PPO and POS plans.
In 1982, Blue Cross and Blue Shield merged into one organization. By then, major insurance providers such as UnitedHealthcare Corporation and Cigna were becoming key industry players. As prices continued rising, health insurance reform efforts persisted.
Since the introduction of the Baylor Plan in 1929, Schaal says, “The concept, in a primitive way, has not changed all that much. What we’re trying to do is prepay for health care.”
