A Brief History of Health Care Payment Reform: The Good, the Bad and the Ugly

Some of the more remarkable elements of the Affordable Care Act (ACA) are the numerous provisions on quality and outcomes and their impact on how we will pay for health care.  How we pay for health care has been a hot button issue since the 1910’s when Teddy Roosevelt first introduced health care reform model.  It is worth looking at attempts  to change how we pay for health care services.

Teddy Roosevelt’s efforts failed in 1917. He had proposed a basically German model of health insurance, but when we entered WWI, any hope of introducing our enemy’s model was doomed to failure.

The Committee on the Costs of Medical Care:  1929-1932

Concerned about the impact of health care costs on families and physicians, the American Medical Association (AMA) fostered the creation of this independent committee to examine health care costs and their unpredictable impacts on families. The Committee’s work was funded by eight private foundations.  It met for about four years and had over 40 people participate in its work from physicians and dentists to economists, bankers and consumers.  It conducted over 30 studies on a range of issues.

The Committee was critical of a fee for service model to pay for health care services, suggesting that it increased health care costs because of all the duplication and redundancies within the system.  The Committee was also concerned about the growing number of medical specialists (then about 30% now over well over 80%) and believed primary care doctors should be the bedrock and gatekeeper of the system.  It thought there should be local and regional community planning to develop a system that met community health needs.  It also recommended an integrated delivery system that was linked from rural communities to larger urban medical centers.

All their work was done during the Depression when there was no health insurance as we know it.  In fact, health insurance was just beginning with Blue Cross and Baylor University to protect the hospital financially.  Blue Shield came later to help protect physicians.

The final recommendations were that public health be widely expanded to promote the health of the community, that quality was the most important element of health care and that disease prevention should be the highest community health priority.

The three provisions that ultimately doomed the Committee’s work were:  1) medical practices should be group practices with salaried physicians who were associated with a hospital; 2) the distribution of the cost of services over a period of time and over a group of families or individuals (basically pre-paid health insurance);  and 3) health care planning and coordination should be done on a local and regional basis for all health care services to provide the most appropriate care with the appropriate number and type of physicians.

To make a longer, more complicated and brutal story short, the Committee’s report was met with charges of “socialized medicine” in the headlines of The New York Times—all because the report interfered with a physician’s right and freedom to determine his or her own practice.   The Committee’s recommendations were never enacted.

Not only were they never enacted, in fact,  the reaction to the Committee’s Recommendations to organize health care delivery around a salaried medical group practice affiliated with a hospital was so intense that Franklin Roosevelt decided not to include a health care plan with The New Deal and Social Security legislation.

Health care reform has often been called the third rail of American politics:  “touch it and die.”  Health care reform failed with the Clinton’s in 1994, when they proposed an employer mandate along with managed care.   It had failed earlier under Nixon as well for any number of reasons.

Pre-Paid and Consumer Managed Health Plans and Boycott of Physicians 

Bolting ahead to the 1940’s, some employers had offered their employees  a pre-paid health plan for many years, such as logging companies and railroads.  The company negotiated with doctors, who would be salaried or paid on a contract basis and would provide services to the company’s employees.  While these company sponsored plans declined over time, they proved a model for independent group practices.

One of the first of these independent pre-paid health plans emerged in Washington State:  Group Health Cooperative in 1947.  The group was funded by members of the Grange, Aero-Mechanics Union and local food and supply cooperatives.  Similar pre-paid group practices with salaried physicians were also developed by Kaiser Shipyards in California and the Health Insurance Plan (HIP) in New York.  Group Health was also governed by public not medical leadership, which was deeply opposed by the AMA. Group Health physicians were immediately blackballed by the King County Medical Society.  It was not until 1951 that the Washington State Supreme Court upheld this model and ordered the King County Medical Society to ban its boycott of Group Health physicians. (The Social Transformation of American Medicine, Paul Starr, pp. 320-327).

Implications for Medicare and Physician Pay

As we move forward to look at how we organize and pay for health care and some of the payment, outcome and quality measures as part of the ACA, it is important to have some understanding of the of the intensity and evolution of reaction to past efforts at health care reform.

One provision of the ACA is the appointment of a 15 member Independent Physician Payment Advisory Board, which is being intensely fought by the AMA.  And, despite the $165,000 annual salary to serve on this board, few people are agreeing to serve.   It’s first report is due on January 2014.


One of the considerable problems with Medicare payment rates is they are not the same across the country.   They are based on a formula called AAPCC  (Average Area Per Capita Costs), so that health care payments are based on local community health care costs, not just one flat fee across the county.  But, it produces some inequities.  When I was a Medicare HMO marketing director in the late 1980’s, we were paid $450 per member per month, but an HMO in Florida was paid over $800 per member per month and in Los Angeles, they were paid about $650 per member per month.  The implications for changing how and what physicians are paid are enormous. There is no way a state with the population of Washington could win equity in Congress opposing states the size of Florida, New York and California.

Coming Next:  ACA and Pilot Payment Projects—Bundling Medicare Payments and the new guaranteed flat fee for elective surgical care offered by some hospitals.

On a lighter note:   The Kaiser Family Foundation has developed a terrific 10 minute animated overview video on the ACA. 


Kathleen O’Connor, February 13, 2013

About Kathleen

Kathleen O’Connor: 30+ year health care consumer advocate, non-profit executive and author. For more information about Kathleen, please see "About" on the main content bar above.
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One Response to A Brief History of Health Care Payment Reform: The Good, the Bad and the Ugly


    I enjoyed learning all the history of attempted health care policies. Betty

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