Healthcare Economics

Value in Healthcare
The History of Medicine in the
United States – 1930-2011

– And the lessons that can be learned in the Middle East

Part 4 of the 5-part series

Continued from Middle East Heath Sept-Oct 2012
(The series is also published online at:


Summary of previous article: The period of 1850 – 1930 was a critical period of development for the medical field. Older but disparate developments by Hippocrates (medical ethics), Galen (anatomy and the science of direct observation), Harvey (circulation of the blood), Vesalius (definitive human anatomy), Pare (early advances in surgical techniques), Morgagni (the anatomical concept of disease), and Jenner (discovery of vaccination) served as a foundation upon which were added subsequent discoveries such as the stethoscope, the germ theory, and the discovery of anesthesia. Put together, this totality of knowledge created, during 1850-1930, a critical mass of information that signaled the dawn of a medical profession that could actually heal suffering patients. Especially visible to all was the success of surgery – as integration of anesthesia, advanced surgical techniques, and infection control created eminently successful outcomes. As the number of such successful outcomes increased, so did the patients’ willingness to pay for procedures. This initiated the era of profit in medicine and, consequently, hospitals started to multiply rapidly. As the medical industry developed, various stakeholders appeared on the scene and, over time organized themselves into powerful lobbies that tried, and mostly succeeded, in molding the healthcare infrastructure and legislation in their favor. The medical profession and allied stakeholders lobbied for autonomy, and aggressively supported legislation that made a strong case for public aid to medicine but without public control. The consequence, as we see it today, is a fragmented, inefficient, and expensive system that ignores the healthcare needs of 50 million Americans. The major lesson to be learnt by Middle Eastern countries, which are currently developing their medical infrastructure, is that comprehensive (universal) medical care for all citizens – the very young, the very old, and everybody in between – is the only way to effectively distribute the risk and cost of medical care. Additionally, parochial interests should be limited in their influence in shaping the healthcare system.

A curious aversion The American public, and of course many political leaders, historically had a viscerally negative response to “universal” health care – which still exists today[1, 2]. This aversion to universal health care does not have a clear explanation in either underlying ideology or political inclination. Before World War I, the reformers of the Progressive Era won the enactment of food and drug regulation, antitrust law, labor legislation, national parks, the Federal Reserve, and workers’ compensation – but did not win on national health insurance. During the 1930s and ‘40s, the New Deal and its successor, the Fair Deal, definitively established federal responsibility for the overall stability and growth of the economy and led to the passage of Social Security, collective bargaining laws, financial regulation, and minimum wage – but not national health insurance. And again, in the era of liberal reform in the 1960s and ‘70s, there was civil rights legislation, antipoverty programs, regulation of occupational safety and consumer products, environmental protection, Medicare for the elderly and Medicaid for some of the poor – but not national health insurance[2]. In fact, for the next 80 years there would be continued and fierce opposition to “universal” health care by various groups for different reasons.

Progressive health insurance: 1915-1919

The idea of universal health coverage in the United States came from Europe. It is useful to briefly look at the evolution of universal health care in Europe. Initially, many European workers were “insured” through sickness funds established by mutual societies, unions, and employers. These funds provided cash benefits to make up for lost wages and paid for doctors’ services. Germany led the way, in 1883, and enacted Sickness Insurance, while Britain followed in 1911. Interestingly enough, both countries enacted such legislation based on political and economic objectives and not because they were concerned with the health of their citizens. Politically, leaders in both countries were trying to diminish the appeal of the socialist, or somewhat more liberal, parties by providing economic support to citizens in the form of health insurance. From the economic standpoint these countries realized that Sickness Insurance enhanced the wealth and power of their nations through improved health and efficiency of its labor force and army[2].

The socialist party in America was rather weak and even though it endorsed universal and compulsory health insurance in 1904, it made little difference. The United States’ general disposition was towards less regulation – in fact to such an extent that the Supreme Court struck down a statutory limit on the working day on grounds that the law interfered with freedom of contract (Lochner v. New York: 1905). The Federal government, in that era then, had essentially no role in public health or in financing medical services.

The first significant reference to health insurance in American politics was in 1912 when the Progressive Party was formed and health insurance was part of their platform[2]. Their reasoning was as sound as arguments for universal coverage ever were in the US. They felt that universal health care was not a special interest of labor or of the poor, but of significant interest to an “enlightened society”. Since healthcare costs, it was recognized even in those days, led to poverty, they argued that spreading the costs of sickness would reduce the prevalence of destitution and dependency and equally importantly, reduce the social burden of disease. Prior to this time, the labor-law reformers had made similar arguments in promoting worker’s compensation (also compulsory) and succeeded. This success gave the Progressives logical hope that universal health care would also be successful.

However, that would not be the case – and again, the reason was parochial interests of various groups. Businesses and employers in general had supported worker’s compensation purely on financial grounds. Jury verdicts for accidents in the work place were on the rise and elementary mathematical calculations revealed that it would be financially beneficial to provide health insurance for accidents in the work place. However, it was quite another story if employers were asked to cover any illness that their workers happened to acquire – businesses saw no benefit for themselves and thus opposed it. It was the same for physicians of the American Medical Association (AMA) – they opposed universal health insurance because they felt it would decrease their ability to charge patients on a fee-forservice basis. Oddly enough, the labor unions (American Federation of Labor - AFL) also opposed universal health care – their reasoning was that workers should look to unions and not to the government for help. Of course this also was a power play as it was a way for unions to build memberships and solidify their influence. Parenthetically, at that time AFL also opposed a minimum wage for workers. The most vociferous opponent of universal health care, however, was the insurance industry even though at that time they had no stake in the healthcare business. The only reason was that universal health coverage also covered some benefits for funeral expenses – and this was the insurance companies’ most profitable line of business[2]. Thus, right from the start powerful, parochial interests thwarted the passage of universal health care and this opposition continued for the next 80 years and continues to this day.

Middle Eastern countries that are developing their healthcare systems should study these lessons carefully and create a system of healthcare that is optimally designed for the delivery of comprehensive care to all citizens and should not let any individual group or institution have undue influence in its design. In April 1917, the US entered World War I and the nation’s attention was diverted from domestic reform to distant hostilities. This was actually a bonanza for opponents of universal health care since the concept had arisen in Germany. Now that Germany was an enemy, of course any idea that may have originated there was a bad one.

Multiple attempts to pass universal health care fail: 1935-1950

Against the above background, it will be easier to understand what happened after World War 1. Proposals for health insurance that were brought forward after 1930 were different in nature, perhaps because of the stinging defeats of the past. Over the subsequent four decades, many partial plans were passed but universal health coverage was never enacted. The time frame represented by the New Deal (technically the series of economic programs enacted by Presidential Order or Congress between 1933 and ’38 in response to the Great Depression) was the moment in American history which was most favorable for the passage of universal health coverage. The Great Depression had caused such misery and the desire to “do something” was so great that every piece of legislation that President Roosevelt asked for in his first 100 days in office in 1933 was passed[3].

During the 1930s the cost of health care continued to rise and it was increasingly difficult for even middle class families to pay for health care. For example, in 1918 average hospital expenses were 7.6% of family medical bills (less than $50/year). However, by 1929 these figures rose to 12% and $108 respectively[4]. This reality shifted the focus of reformers from coverage of narrow, specific elements, such as replacement of lost wages during sickness, provision of paid maternity leave, and funeral benefits, to more expanded coverage of healthcare benefits. This reality also meant that hospitals began to have financial problems since fewer citizens could pay for their services. In response to this reality, hospitals and hospital associations in Texas, California, and other states created the first health insurance plans for groups of employees to cover hospital expenses. These plans were run on a non-profit basis and eventually evolved into the Blue Cross system[1, 2].

Throughout President Roosevelt’s tenure there were multiple efforts to implement some form of universal medical insurance but he was thwarted every time by the same groups discussed above. Especially, vociferous in its opposition was the AMA who had only their parochial, financial interests in mind. During the late 1930s the Second World War erupted and the US declared war on Japan on December 8, 1941. This clearly had an effect as the nation’s attention was once again diverted from domestic reform to substantial military engagements until 1945 when WW2 ended[5].

Harry Truman, who took over after Roosevelt died in 1945, was the first President to actually propose a federally run, compulsory, essentially universal health insurance plan. As expected, the battle was fierce and this was the one moment in US history where the nation came very close to actually adopting universal health care – but it was not to be. Once again, WW2 was pivotal and the fact that a significant part of the war was against “socialist” countries played a major, but illogical, role in the campaign against universal health care. Opponents deemed it “socialized” medicine. Defeat of the Truman plan was equated with “preserving the American way” and preventing insidious and subversive forces from foisting socialism and communism on an unsuspecting American public. The detractors won the day and universal health care was defeated. However, in this fray, what survived was the aid for hospital construction and medical research (of course supported by those who benefited financially by building more hospitals). In 1950, Congress also enacted a small program of healthcare benefits using federal aid to states for welfare recipients – the birth of Medicaid[4].

The creation of Medicare/Medicaid: 1950 – 1965

This time period was critical to the eventual creation of the current US healthcare system. There was a decisive shift towards private, employer-based health insurance with separate programs for the elderly (Medicare) and the poor (Medicaid). This was the beginning of a costly, extremely complicated system which protected enough of the public to make the system resistant to change. When private insurance was born (Blue Cross), it provided coverage at a “community rate” – the same price for all employee groups in an area. However, as commercial insurers entered the market they cherry picked, selling coverage to younger, healthier people at lower rates. This left Blue Cross with all the high cost, sicker, people to insure – which was not financially viable and eventually Blue Cross had to adjust its rates to be competitive with the commercial insurers. This was the beginning of higher premiums for sicker, older patients. So what were the elderly to do?

It is interesting to note that no country has ever created separate healthcare financing for the elderly. Of course, once the piecemeal approach to health care had started, and employer-based insurance took hold, then the rationale for having a separate program for the elderly also made sense – especially since the elderly were neither employed nor could afford the high premiums demanded by commercial insurers. This is a critical lesson for countries in the Middle East that are currently developing their healthcare infrastructure – piecemeal coverage of various groups in the population will lead to an inevitable cascade of increasingly complex and expensive healthcare and make it more difficult to enact universal health care since the groups already covered have nothing to gain by supporting coverage of uninsured groups in the population.

Congress eventually passed a broad Medicare bill (health insurance for the elderly) in 1965 which was a result of political compromises – Democrats’ compulsory hospital insurance program (became Medicare Part A), the Republican voluntary program to cover physicians’ bills (became Medicare Part B), and an expansion of other aid to the poor (which became Medicaid). This, in essence, created separate and unequal programs for the elderly and the poor – the elderly receiving the upper tier, mostly an “earned right”, and the poor, receiving “undeserved” help. This was reflected mostly in the fact that Medicare was the same in every state whereas Medicaid was left to the vagaries of each individual state. Medicaid was also linked to eligibility for welfare. However, since states varied in their criteria for welfare and in their criteria for what was covered under Medicaid if one did receive welfare, many people who qualified for Medicaid in one state did not qualify in another state. Additionally, states decided on the reimbursement for doctors’ services, which were so low in certain states that doctors just refused to accept Medicaid patients.

The Medicare legislation itself was also far from perfect. One of the major deficiencies was the absence of any cost restraints – reimbursement to hospitals was based on cost. Thus, the higher the cost of health care provided, the more money hospitals received. As it later became clear – a better way to exponentially inflate the cost of healthcare could not have been devised.

As this time period and the legislation created are responsible for the immensely complex system the US deals with today, it would be useful to summarize the results of this legislation:

- It added a tremendous amount of complexity to healthcare finance

  - Medicare was divided into two parts – both working on different principles
  - Coverage was not adequate so many elderly bought private supplemental insurance
  - Some elderly, if poor enough, or spent down their assets, could also be covered by Medicaid

- it forced hospitals, doctors, and other providers to add numerous administrative personnel
  - Sorting out the myriad private plans and multiple government payment systems required extra personnel

- It led to infinitely more bureaucracy
  - Critics of a single, federal insurance plan stated that it would be a bureaucratic nightmare to administer. In reality, it was the Medicare/Medicaid legislation that led to the bureaucratic nightmare

- It linked healthcare coverage to poverty
  - This had the perverse effect of keeping people from taking low paying jobs. Many people on welfare faced the loss of health coverage if they took the kind of job typically available to them – low-wage work without health insurance. This was a strong incentive for people to stay on welfare. The Medicaid-welfare link increased the welfare rolls by about 25%[6]

- It created a class of Americans without healthcare coverage that was disproportionately the working poor and the sick
  - Working poor had no access to either employment-based insurance or to a public program
  - The sick and high risk individuals were deemed “uninsurable” by private insurance companies

- It covered just enough people that there was not a broad enough base of uninsured people to force the issue of national health care
  - In 1970, the uninsured was about 12% of the population[7]
  - This relatively low percentage gave the false impression that “universal coverage” through these piecemeal approaches was reachable
  - Once employment-based insurance and Medicare were established, a large block of voters saw little for themselves, except higher taxes, in a program to cover the remaining uninsured
  - This hope of universal coverage was quickly dashed when the number of uninsured (50 million in 2010 – about 16.3% of the population) and healthcare costs began to rise exponentially.

These consequences should serve as a pivotal lesson for Middle Eastern, and other countries in the process of creating their healthcare infrastructure.

Realisation of a healthcare crisis: 1970 – 1980

As costs of health care escalated out of control (from 1965 to 1970 state and federal health expenditures rose at an annual rate of 20.8% – an unsustainable rate) and the number of uninsured increased, there was significant alarm registered by the press and the politicians. Certainly, by the early 1970s most agreed that there was a “healthcare crisis” in the making. President Richard Nixon said in July 1969, “unless we take action within the next two or three years…we will have a breakdown in our medical system[8]”. Nixon, despite his party affiliation (Republican), proposed a healthcare plan that was as close to “universal” as could have been accomplished at that time – although mostly due to competition with, and in response to, Senator Edward Kennedy’s healthcare proposal. However, as the 1972 presidential election approached, Congress and Nixon were unable to reach an agreement. At the beginning of his second term, however, Nixon made healthcare reform a top priority. However, by this time, the Watergate Scandal had begun to unfold. Despite this, however, he sent his healthcare plan to Congress in February 1974. There is evidence that there was enough support for his healthcare bill that it would most likely have been passed by Congress[8]. However, once again, it was not to be, and as the Watergate Scandal reached its peak, and impeachment seemed essentially unavoidable, Nixon resigned on August 6, 1974. In 1975, President Gerald Ford did not resubmit Nixon’s health insurance plan to Congress. Like in the past, the general state of the country now also played a significant role in the path that healthcare reform took. The 1970s was marked by decreasing economic growth, inflation, increasing economic inequalities, decreasing personal incomes, and consequently, a growing anti-government, anti-tax sentiment. In this climate, the focus changed from healthcare coverage to healthcare costcontainment. Additionally, President Jimmy Carter, elected in 1976, had no significant interest in universal health care and he generally balked at taking any significant action. In 1979, he submitted a half-hearted, Nixon-type plan but it went nowhere. In response to the faltering economy, and high inflation, Ronald Reagan was elected in 1980, which completely pushed universal coverage off the national agenda.

Incremental changes to the existing system: 1980-1990

In the 1980s, health policy followed an unexpected course. Under the Republican Presidency of Ronald Reagan, it would have been expected that government spending would decrease and health care would tilt towards the stewardship of private insurers and be left to the mercy of market forces. The opposite happened – Medicare was expanded and there was stronger regulatory authority to control prices that Medicare paid hospitals. This was essentially a continued focus, from the Carter years, on cost control rather than coverage, mostly due to fiscal realities. In 1983, Congress passed the biggest change in Medicare payment systems by introducing the diagnosis-related groups (DRGs) – where hospitals were paid prospectively for certain related diagnoses. This was the first time that hospitals actually had an incentive to control costs. DRGs also led to a rise in the popularity of Health Maintenance Organizations (HMOs) – e.g. in 1978, 95% of employees with health benefits had traditional fee-for-service insurance compared to 71% in

Universal coverage is considered again: 1990-2006

As the cost of healthcare insurance spiraled out of control during the 1980s, and significantly increased numbers of employees began to feel the brunt of this cost, universal health coverage rose from the ashes in the 1990s as a major issue. There was astounding consensus, even from the American Medical Association (AMA), Health Insurance Association of America, American Hospital Association, and business leaders, that radical change in healthcare financing and delivery was needed[9]. However, there was a problem – nobody agreed on a solution. There was no clear imperative that compelled action by the Government, no political imperative that forced the supporters of competing visions of reform to resolve their differences. None of the strategies devised by President Bill Clinton or congressional leaders could bridge the fissures among democratic factions, moderate Republicans, and influential interest groups. Thus, while supporters of the reform fought over possible solutions, the opponents took advantage of the delay and confusion and, framing the issue as a decisive ideological test, convinced business groups, elite opinion, and a large part of the public to reject it[10].

The conservative republicans who swept into power in Congress in January 1995 reframed the national agenda in health care and the priority became cutting taxes and decreasing government spending. This effort went through three phases. First, during 1995-96, efforts by the Republican Congress to substantially roll back existing rights to Medicare and Medicaid created a historical confrontation with then President Clinton. However, Clinton proved more agile and determined than the Republicans expected, and he allowed the Federal Government to shut down rather than accede to the Republicans’ demands. Clinton was to be, as he himself put it, a defender of “Medicare, Medicaid, education, and the environment”[11]. Second, a somewhat quieter phase began in mid- 1996 when the economy began to recover. There were some bipartisan compromises on health policy and budget but not much changed in favor or reduction of health benefits. In fact, the Republicans actually agreed to a new government health insurance program for children. Third, when George W Bush came to office in 2001, there was some inclination that there would be renewed momentum to challenge the basic tenets of Medicare and Medicaid. However, quite surprisingly, President Bush and the Republican Congress actually enlarged Medicare by passing a new Medicare prescription-drug benefit – although this was done on terms that were quite lucrative for the pharmaceutical industry and associated with conditions that promoted high-deductible private health insurance combined with a tax–free health savings account. In the end, the period of 1995- 2006, of Republican control of the Congress, did not see the destruction of the welfare state. And even though the central issue of universal health care was not resolved, there was creation of yet two new programs – first for children in 1997 and then for the elderly in 2003 (Medicare Modernization Act). Additionally, Medicaid was decoupled from the requirement that beneficiaries be eligible for welfare. However, a dozen years of not addressing the central issue – universal health care – essentially “kicked the can down the road” and the delay rendered the economic challenges and costs of healthcare reform even more

Universal health care – the final push: 2006 – Present

Multiple realities were now coming together in the period from 2006-2010 that forced all stake holders to try and reconcile differences. Especially persuasive was the bare reality that more and more people were being forced out of healthcare insurance because they simply couldn’t afford it (50 million in 2010). Thus, all major stake holders – hospitals, doctors, insurance companies – would experience decreased revenues. Once again, ironically, it was the parochial, financial interests of the stake holders that would lead to support of universal health care, the very same parochial interests that had blocked universal health care over the past many decades. Had all these stake holders been trumped by a strong national policy of universal health care early in the 20th century, the US would have had a comprehensive, inclusive, and lower cost healthcare system. This is a critical lesson for countries in the Middle East that are developing their medical infrastructure – a strong national policy that keeps the interests of the nation’s health and its fiscal realities foremost is important to create a responsible, universal, and comprehensive healthcare infrastructure[12].

In addition to the financial realities enumerated above, including the country’s financial free fall of late 2008, the 2008 US elections further prepared the ground for passage of universal healthcare. The democrats won the Presidency (Barack Obama) with a majority in both the Senate and the House. The details of how the healthcare bill (Patient Protection and Affordable Care Act - PPACA – aka Obamacare) was passed by the Senate and the House with razor thin margins are intricate, complex, and fascinating, but beyond the scope of this article. An account can be found in the references[13].

On March 25th 2010, the PPACA officially became law. This was, of course challenged by opponents but the Supreme Court of the United States upheld most of the PPACA in June 2012. Of special note, and which was upheld, was the “individual mandate” which required all individuals to acquire health insurance. Additionally, private insurance companies would not be able to refuse anyone coverage because of preexisting conditions. A summary of the PPACA is referenced for further details[14]. It is clear that when history is written, the PPACA will most likely be hailed as Obama’s greatest accomplishment.


It is interesting that after almost 80 years of trying to deliver health care in every way except universal coverage, the United States finally decided that universal health coverage was the right way forward. Although universal health care can be delivered in multiple ways (single payer/single program – most efficient administratively, multiple programs, Government vs. private coverage, combination of Government and private, and many others), it is curious that, among other things, the somewhat vague and illogical, but deliberately promulgated, association of universal health care with socialism, communism, and a single payer system prevented the early acceptance of universal health care. In fact, even the PPACA passed in 2012, by barely a whisker of a vote, would certainly not have passed if it had as its central tenet a single payer system. Thus, the American healthcare system developed essentially in reverse compared to other universal healthcare systems by providing piecemeal coverage to various groups of people. This created a political, economic, and ideological climate that made opposition to universal health care hard to overcome. First, there were enough people (employed, elderly, veterans, disabled, etc.) that were covered and most of these groups, such as the elderly and veterans, were well organized and enjoyed wide public sympathy. Thus, trying to change to a system that didn’t necessarily benefit these groups but actually asked them to pay more to cover others was difficult. Second, a financing system, like Medicare, which essentially gave hospitals and doctors carte blanche to charge whatever they wanted, and financially enriched the healthcare industry, created powerful special interests that did not want any change at all. A combination of these factors led to the enormously complicated, fragmented, and exponentially costly healthcare delivery system in the US. It is ironic that the same special interests that prevented implementation of universal healthcare delivery throughout the 20th century, because they would lose money, supported universal health care in 2012 for the very same reason – they stood to lose money because increasingly people could not afford to purchase healthcare insurance. It would seem that the 80-year journey to avoid universal health care may not have been worth it.

The next, and final, article of the series will propose a system of metrics that measures efficiency of healthcare delivery and emphasizes the development and continuous improvement of a comprehensive healthcare delivery system.


1. Starr, P., The Social Transformation of American Medicine 1982: Basic Books.

2. Starr, P., Remedy and Reaction - The Peculiar American Struggle over Healthcare Reform 2011, New Haven, CT: Yale University Press.

3. The New Deal. 2012; Available from:

4. Starr, P., The New Deal and National Health Insurance, in Remedy and Reaction - The Peculiar American Struggle over Health Care Reform, P. Starr, Editor 2011, Yale University Press: New Haven, CT.

5. World War II in Europe. 2012; Available from: /timeline/ww2time.htm.

6. Moffitt, R. and B. Wolfe, The Effect of the Medicaid Program on Welfare Participation and Labor Supply. Review of Economics and Statistics, 1992. 74.

7. Starr, P., Evolution Through Defeat, P. Starr, Editor 2011, Yale University: New Haven and London.

8. Starr, P., Stumbling Towards Comprehensive Reform, in Remedy and Reaction - The Peculiar American Struggle Over Health Care Reform, P. Starr, Editor 2011, Yale University: New Haven, CT.

9. Starr, P., Shaping of the Clinton Health Plan, in Remedy and Reaction - The Peculiar American Struggle Over Health Care Reform, P. Starr, Editor 2011, Yale University: New Haven, CT.

10. Starr, P., Getting to No, in Remedy and Reaction - The Peculiar American Struggle Over Health Care Reform., P. Starr, Editor 2011, Yale University: New Haven.

11. Starr, P., Comes the Counterrevolution, in Remedy and Reaction - The Peculiar American Struggle over Health Care Reform, P. Starr, Editor 2011, Yale University: New Haveb.

12. Starr, P., Rise of a Reform Consensus, in Remedy and Reaction - The Peculiar American Struggle Over Health Care Reform, P. Starr, Editor 2011, Yale University Press: New Haven, CT.

13. Starr, P., Breaking Through, in Remedy and Reaction - The Peculiar American Struggle over Health Care Reform, P. Starr, Editor 2011, Yale University Press: New Haven, CT.

14. CWLA. The patient protection care act, HR 3590 (PL 111. 2012; Available from:


Date of upload: 22nd Jan 2013


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