The story of health insurance in the United States isn’t just a tale of the past – it’s the foundation of today’s health care challenges and choices. Every debate about premiums, coverage, and reform is rooted in decisions made decades ago that continue to shape our system. And many of the questions we face today, such as who should pay for health care and how, echo throughout our history, from the first sickness funds to the latest reforms. By understanding where our system came from, we stand to better navigate its current complexities and imagine how it might evolve to serve us all more effectively in the future.
Before Official Health Insurance: Sickness Funds and Worker’s Compensation
In the early 1900s, workplace injuries were common, and industrial sickness funds – offered by employers, unions, and fraternal organizations – provided early forms of health coverage in the form of financial assistance. The Granite Cutters Union, for example, established one of the first national sick benefit programs before the turn of the century. This program protected workers against losses of income related to sickness but did not directly cover any health care services.
During this time, employers were legally responsible for workplace injuries if they could be found negligent. To address frequent injuries and costly litigation, between 1910 and 1915, 32 states enacted some form of worker’s compensation program, further shifting injury costs to employers but also providing them with insurance options. Employers who purchased this insurance retained legal defenses, while those who did not lost them. Organized medicine supported these laws, expecting increased business, but because employers often chose to hire their own physicians, these programs interestingly reduced demand for local doctors.
1930s: Hospital and Physician Plans, Commercial Insurance, and Prepaid Group Practice
Hospital Plans: In 1929, Baylor University Hospital developed the first prepaid insurance plan, offering teachers 21 days of annual hospital care for 50 cents a month. The Sacramento Plan came soon after, offering coverage at any hospital in the Sacramento community. By 1933, 26 hospital plans had been established, and the American Hospital Association (AHA) formed a committee to approve these plans, which would later become the AHA Blue Cross Commission. Hospital plans had to be nonprofit, designed for public welfare, promoted in a dignified way, and restricted to hospital visits, with free choice of physicians. In 1937, competition between plans was forbidden.
Physician Plans: In 1939, the California Physician’s Service became the first to offer a plan covering physician visits rather than hospital visits – what is now known as the first Blue Shield plan. The American Medical Association (AMA) began approving these plans the same year, with a similar model as the Blue Cross Commission. Plans were required to provide free choice of physician and use an indemnity approach to pay the patient directly, who then paid the physician.
Commercial Insurance: Inspired by hospital and physician plans, commercial insurers also began offering health insurance during this time. Previously, commercial insurers worried that health insurance would present an incentive to fake illnesses, but providing insurance for specific appointments and procedures revealed a way around this. In 1934, commercial insurers started offering hospital coverage and in 1938, surgical coverage. Like physician plans, commercial insurers used an indemnity approach to avoid contracting with specific hospitals or physicians.
Prepaid Group Practice: Prepaid group practice plans were developing during this time as well, but these plans were strongly opposed by medical societies. The Ross-Loos Clinic in Los Angeles, for example, provided pre-paid care to 2,000 Los Angeles Department of Water and Power workers and their families. As a result, the county medical society expelled the founders of the clinic, which meant they were denied hospital access. Similar stories took place in other states across the country, so early prepaid plans turned to building and using their own hospitals. This is why today’s health maintenance organizations (HMOs) originally began operating their own facilities.
Why was there so much opposition to prepaid group practice plans?
At the time, many physicians used a sliding fee scale, charging higher prices to higher-income patients to assist with lower-income patient care. Historians (such as Reuben Kessel) have argued that physicians were opposed to prepaid group practice largely because it decreased the profits that stood to be gained from this sliding fee scale.
1940s and 1950s: The Growth of Employer-Based Health Insurance
At the start of World War II, 9% of the U.S. population was enrolled in some kind of health insurance. By the end of WWII, that population reached an estimated 23% and by 1960, was almost 70%. This growth was largely due to three reasons:
- Industry wages were standardized in 1942, but health insurance coverage was not. As such, competitive health insurance plans were one of the few ways to attract employees.
- The 1947 Taft-Hartley Act defined health insurance as a condition of employment, subjecting it to collective bargaining and organized labor influence.
- In 1954, Congress officially exempted employer-sponsored health insurance from federal income taxation, making it a particularly attractive form of compensation.
How much does not taxing employer-sponsored health coverage cost the U.S.?
The Congressional Budget Office (CBO) estimated that in 2013, the cost of not taxing employer-sponsored insurance equaled roughly $248 billion – only slightly less than the total cost of Medicare spending for both inpatient and outpatient hospital services the prior year.
1960s: Health Coverage for Seniors and Low-Income Populations
The Hill-Burton Act of 1946 led to a considerable amount of subsidized hospital and nursing home construction prior to and during the 1960s – and set the stage for many of the health insurance changes during this period. Many who had previously advocated for a national plan shifted their attention to securing medical care for the elderly, and in 1960, the Kerr-Mills Act passed, allocating federal funding to states to provide medical care for seniors on welfare benefits.
As health coverage for seniors became a prominent focus, advocates tended to argue for one of three approaches. In 1965, all three approaches became different parts of Medicare and Medicaid:
- Unions, backed by the AHA, advocated for Medicare based on Social Security rather than income, which meant more union workers would be covered. They also argued that funding should come from payroll taxes, as these don’t fluctuate with income and wouldn’t require higher-wage workers (which most union workers were) to pay more than lower-wage workers. This became Medicare Part A.
- Many republican politicians opposed the union plan and argued instead for a voluntary program based on need and financed by both general tax revenues and premiums paid by seniors. This became Medicare Part B.
- The AMA advocated for an Eldercare model, which was essentially an expansion of the Kerr-Mills federal funding. This was broadened to include some low-income populations, adjusted to operate on federal-state matching funds, and became the Medicaid program.
1970s: The Rise of Employer Self-Insurance
In 1974, the Employee Retirement Income Security Act (ERISA) determined that self-insured employer plans – where the employer pays for claims directly – were not subject to state insurance regulations. This led to a sudden, significant increase in firms opting for self-insurance and sparked considerable changes in the insurance landscape. For example, the third-party administrator (TPA) profession was established to assist firms with self-insurance programs. Following ERISA, there was also a sudden increase in state insurance regulations, as large firms were no longer concerned with lobbying against such regulations. Before 1974, there were basically zero state insurance coverage mandates. By the end of 2011, there were over 2,200 individual mandates.
1980s–2000s: New Private Plan Options and Expansions to Medicaid and Medicare
In the 1980s, private insurance saw a few notable changes: traditional insurance declined, prepaid group practice plans (HMOs) grew, and new forms of managed care were developed, including preferred provider organizations (PPOs) and point-of-service (POS) plans. In the mid-2000s, high-deductible health plans (HDHPs) began being offered, followed by consumer-directed health plans, which combined HDHPs with tax-sheltered health savings accounts for consumers.
Additionally, Medicaid and Medicare saw notable expansions during this time. Medicaid was expanded to include pregnant women and children up to age 6 with household incomes below 133% of the federal poverty limit (FPL) as well as children between 6 and 18 with household incomes at 100% of the FPL, with the state option to increase FPL limits. Then, in 1997, the State Children’s Health Insurance Program (currently CHIP) began, allowing states to expand coverage to children in households with 300% of the FPL. Medicare Part D was also added, providing seniors with prescription drug coverage options.
2010–Present: The Affordable Care Act, Pandemic Response, and Recent Changes
In 2010, the Affordable Care Act (ACA) was enacted, transforming U.S. health insurance in several important ways. The ACA mandates that employers with 50 or more full-time equivalent employees must provide affordable health insurance coverage or face penalties – it also initially required all individuals to obtain some form of coverage or risk tax fee penalties. Additionally, the ACA introduced considerable health insurance subsidies, expanded Medicaid to cover ages 19–64, and enacted new regulations to ensure plans provide comprehensive coverage and do not discriminate based on pre-existing conditions.
Since the ACA went into effect, U.S. health insurance has gone through several additional changes. In 2017, the Tax Cuts and Jobs Act removed the ACA penalty for consumers who do not maintain coverage. And in March 2020, the Families First Coronavirus Response Act (FFCRA) temporarily increased state Medicaid funding for states who maintained continuous coverage during the COVID-19 pandemic. Most recently, in 2025, the “One Big Beautiful Bill Act” (OBBBA) was passed, making considerable changes to Medicaid and Medicare by decreasing federal funding, increasing state-expected funding, and implementing federal Medicaid community engagement (work) requirements for the first time in health insurance history.
Looking to the Future: Navigating Ongoing Change
The evolution of health insurance in the United States highlights the complexity of delivering care and the many factors that influence coverage and access. As the nation continues to debate the future of health care and navigate the funding and community engagement changes implemented by the OBBBA, understanding this rich history reminds us that change is both possible and inevitable, shaped by the needs and priorities of every generation. And it does not stop here. Looking ahead, what do future generations want to see changed? And what will it take to get there?
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