Ensuring America’s Health: How Insurance Companies Came to Govern U.S. Health Care

This paper will examine how federal policies propelled insurance companies to the center of the U.S. health care system.  Many scholars assume that insurance companies play a natural function in the financing and organization of health services.  Yet insurers did not gain their central position through competitive market processes that sought efficiency.  The way federal politics interacted with the private sector led insurers to expand their role from simply underwriting the risks associated with medical services consumption to also managing and coordinating the health care system.

For the first several decades of the twentieth century, businesses, unions, consumer cooperatives, and physicians experimented with various models of financing and organizing health care.  By the 1940s, however, organized physicians had decided that insurance-company policies were the only acceptable form of medical services prepayment.  Most policymakers recognized that insurance-company-funded health care was inherently expensive.  Thus, even after private interests defeated Truman’s plan for a government-managed health care system, President Eisenhower and congressional Republicans and Democrats sponsored various reform proposals to create a more efficient and equitable system.

In order to prove that they could expand insurance and meet social goals without federal interference, insurance companies transformed health coverage from a high-end product for a select few into a mass consumer good.  Insurers also converted their product from a restricted mechanism that partially protected against hospital bills into a device for covering almost all costs associated with medical care.  In the process, insurers created the institutions necessary for supervising physicians and attempting to regulate costs. 

When policymakers created Medicare in 1965, they adopted the institutional framework that insurers had already established, thereby legitimizing the insurance-company model that had previously been so contested.