Special Report: Health Care as Creed, Greed and Compensation

Introduction:  Listening to all the debates, accounts and news about the Affordable Care Act took me back to my  book:  The Buck Stops Nowhere:  Why America’s Health Care Is All Dollars and No Sense, first published in 2001. In Chapter 4, I took a look at the politics, incentives and perverse incentives, and costs in our health care system.  The following is an updated version of that chapter.  For those of you who do not know me, I am not a health care professional–my degrees are actually in Japanese and comparative governments–I am trained to look at systems.  I have worked in health care most of my professional life largely as an interpreter of the system for a curious public.

This is a sweeping, overly simplified account of complex issues, but at least it outlines some of the historical battles over policy, politics and costs of health care reform.  And hopefully adds some perspective on what underlies the current fight over the Affordable Care Act. 

Chapter 4: Where We Went Wrong:  Health care as Creed, Greed and Compensation

 Our battle over national health insurance and health care reform has raged since the early 1900’s in various forms. We ran amuck on several fronts.

We made three basic mistakes.  First, the debate has always been ideological—single payer/government run/public option vs. private pay/voucher/marketplace. Neither side listens to  nor learns from each other.  Second, health care became an employee benefit and a part of employee compensation and “terms and conditions of employment.” And, finally, we never tied the public health system to the commercial/employer based insurance system. This means we left those who were not in employer-based insurance programs without any reliable and consistent safety net or affordable alternatives. Of our economic peers, we are the only country that does.   


The health care reform debate has been embedded in our political and ideological creeds. As a nation, we are fiercely independent and believe people should pull themselves up by the bootstraps, so we tend to stress personal vs. governmental solutions.  We take a “may the best man win” approach to life.

Prior to World War II, people largely paid for their own doctor or hospital care with some private insurance or out of their own money. Most employers did not offer health insurance. We first began moving toward national health insurance model in the early 1900’s when Congress was considering adopting an insurance program that emerged from Bismarck’s Germany.  The outbreak of World War I helped stall that course of action because Germany was our enemy.

Additionally, the early calls for health insurance came out of the labor movement and Teddy Roosevelt’s Progressive Party, which meant many employers resisted it because they resisted unions.  Because labor had sponsored some of the early forms of health insurance for their members, health care reform got blended in with the politics of the time and was framed as part of a socialist labor movement.

Consequently, any hint at national health insurance was seen as a move toward socialism and government control of physician salaries and hospital rates.  Organized medicine has consistently fought government intrusion into health care for fear it would take away their independent fee for service practices, their ability to set their own rates, and control of their medical decisions.

The call for health care reform has erupted periodically in one form or another in nearly every decade since the 1900’s.  In 1915, some early labor unions advocated and drafted legislation for a German form of national health insurance. They argued that health insurance should be covered, because sickness was the leading form of poverty.  But that initiative was defeated by employers and doctors and, interestingly enough, another labor union, the American Federation of Labor (AF of L).

While health care costs in the early 1900’s remained largely an individual responsibility, there were some exceptions for some workers’ disability insurance and some volunteer associations that offered insurance for its members. Some large employer industries, such as logging, mining and the railroads offered health coverage for their employees because of the dangerous nature of these industries.

The “Roaring Twenties” brought prosperity to the US and greater use of health care services. As costs increased and began hitting the middle class, the pressure was on again to do something about the health care system.  In 1929, we spent $366 billion on health care, roughly 4 percent of the Gross Domestic Product or $30/person per year.

The Committee on the Costs of Medical Care formed in 1929 as an outgrowth of a committee of the American Medical Association.  Funded by eight private foundations over four years, the Committee recommended an end to a fee for service payment system, among other things, citing this payment system as the reason for high health care costs.  Not only were the Committee’s recommendations not adopted, the debate was so acrimonious and its minority report was so intense President Franklin D. Roosevelt decided not to include it in the New Deal, fearing it would take everything else down with it.

The Depression further knocked the wind out of reform sails. Unemployment took precedence over health insurance.  Hospitals and doctors were in dire financial straits, however.  Even though physicians had resisted national heath insurance earlier, they needed some payment system that would help keep them solvent.  By 1933, doctors had lost 47 percent of the income they had in 1929. By 1931, private hospital revenues dropped from $236 per day to $59 per day and only 62 percent of their beds were used compared to 89 percent at the government hospitals.

If people owed money, doctors and hospitals were last in line to be paid.  During the Depression they ranked fifth, behind department stores, grocery stores, landlords, and even dentists in unpaid bills.

Clearly something had to be done to save their practices.  However, they wanted to do so without government interference.  Hospitals banded together to create voluntary and hospital-based insurance. The first model came out of Texas, when Baylor University Hospital offered 1,500 teachers twenty-one free days of hospital care if they paid the hospital $6/per person per month. By 1932, the American Hospital Association created an insurance model that revolved around hospitals, assured freedom of patient choice of physician—thereby keeping doctors as allies—and  let local hospitals band together so they would not be in competition with each other.

Because this was a hospital-based form of coverage, no prevention benefits or doctor fees were included. This model eventually became what is now Blue Cross.  The doctors did not fight this form of insurance because if patients could cover the costs of the more costly hospital care, they would be in a better position to pay their doctor bills.

The doctors also decided this model might work for them, so they began organizing around local medical bureaus or county medical associations. These early groups were nonprofit, did not include prevention benefits, and left the doctors in charge of the organization. To participate, members had to join the medical bureaus, which essentially meant the medical bureaus had no competitors. They had full control and no third party insurance payer could tell them what to do or how to set their rates.

At the same time, however, another movement came along in the form of prepaid health plans that some doctors began offering employers as another way to pay for health care.  These became some of our current staff model HMOs, such as Group Health of Puget Sound, Harvard Pilgrim Health Plan, Kaiser Permanente, and the former Group Health Association of Washington DC.

These groups were essentially “cooperatives” that offered their services to employers.  They received a flat fee each month for each person who joined, rather than accepting pay for each patient visit.  The medical establishment went after them for blood.

Doctors in those cooperatives were thrown out of the medical societies, which meant they lost their license and ability to practice medicine. They were labeled socialists and communists, were blackballed and lost their admitting privileges to hospitals. The American Medical Association (AMA) was so livid at these arrangements and the potential threat for independent practices that they actually tried to get the Group Health Association of Washington DC disbanded as a violation of the Anti-Trust Act.

Their tactics backfired. In 1938, the Justice Department indicted the AMA for restraint of trade in their attempt to destroy Group Health.  Appeal followed appeal. The AMA finally lost in a decision handed down by the Supreme Court in 1943.

These ideological lines continued into the 1940’s and 1950’s with the Cold War. Anything that could be construed as looking like socialism or communism was condemned as McCarthyism swept the country.

Truman proposed national health insurance which was again defeated by an organized AMA.  In 1950, the AMA spent $2.25 million to defeat the move toward national health insurance.  About half that money was spent in a whirlwind media and advertising blitz in the week before the election.

The business community kicked in another $2 million.  Newspaper ads that spanned five columns, ran in the then 10,000 plus weekly and daily papers, radio ads were delivered on 1,600 radio stations, and more print ads appeared in 35 major national and regional magazines.  The message was clear—and any hope of national health care reform went down in defeat, even though most Americans prior to this media blitz had favored some form of national health insurance.

In the 1960’s, Kennedy wanted a national health insurance program and campaigning for it around the country when he was killed.  The Johnson era focused on the War on Poverty and the civil rights movement, but the push for national health insurance was again left on the sidelines, except for two important measures—Medicaid and Medicare.

Medicare and Medicaid passed in 1965 because of the War on Poverty and immense grassroots pressure to care for the elderly and the poor who were increasingly unable to afford health care.  Medicare divided health care services into two groups: mandatory hospital insurance for the elderly (Part A) and voluntary Part B for physician coverage.

By 1965, hospital costs had doubled since 1950.  While only one in six people was over the age of 65.  When they went to the hospital, however, they stayed over twice as long as someone under age 65.  Hospital costs began literally bankrupting the elderly.

Also, between the late 1950’s, because of the Blues and post-World-War-II wage and price policies, the health insurance patterns of Americans had changed.  Health care was no longer largely personal, it was increasingly corporate.

By the late 1950’s, nearly 78 percent of all main wage earners in full-time jobs had health insurance, as did 36 percent for those with temporary jobs and 43 percent of all retired people.  By 1954, 60 percent of all Americans had hospital insurance and 25 percent had medical insurance.

It is important to note that it was not until the late 1930’s and early 1940’s and the discovery and use of penicillin that doctors could actually cure diseases. As a result of penicillin’s success and the tremendous medical advances that emerged from World War II—largely trauma care and cures—the federal government directed an unprecedented amount of money into the science of health care, drugs, and technological advances between 1950 and 1970.  And an industry exploded.

The victory of wonder drugs in curing diseases fueled interest in more research to cure even more diseases and an unbridled investment in medical and scientific research and education began.

Between 1950 and 1971, the number of people employed by the medical industry rose from 1.2 million to 3.9 million and health care spending grew from 4.5 percent of the GDP to 7.3 percent. (We are now at nearly 20%).

In 1971, Nixon proposed a national health care system with a minimum benefit package to be run by the federal government.  But the plan was defeated by the opposition of employers who did not want a minimum benefit package imposed on them—because employers use health care benefits to attract and retain employees—and by doctors and hospitals that did not want government-run health care, rate controls or government interference.

Ideological approach to health insurance reared its head again when Clinton tried to introduce national health insurance.  That the plan included private insurance, not just public insurance, made no difference. It ran smack into “Harry and Louise”—the TV couple who terrorized the American public that this would be “government run health care.” Charges of socialized medicine derailed that attempt as well.

When it comes to reforming health care, we remain trapped by our ideology and our view about the role of government.  One extreme is the personal responsibility/marketplace side voucher that lets employers simply give their employees a flat fee and lets them manage their own health care costs and services.

The other extreme is the single payer, government-run health care approach that would eliminate insurance companies and let the government set rates and manage health care services. Any discussion about health care is lost in the screaming match between these two groups, which drowns out any attempt to look at the system in a non-ideological way.

The fact that the Affordable Care Act passed in 2009 is nothing more than astonishing.  It’s successful implementation, however, will be an incredible challenge.

Doctors, hospitals, drug and medical device companies and many employers will work to keep the government out of health care. This means the amount of money to fight reform is vastly in favor of employers, doctors, drug companies, and hospitals and others who want to retain their commercial independence and financial control and resist regulation—literally at any cost.   Consumer advocacy or independent groups cannot match those combined deep pockets.  It remains to be seen if there are enough advocates or enough clarity from the Administration now to fuel the implementation.

Within the past 15 years, however, more and more employers are jumping into the fray and insisting on value based purchasing of health care.  They are examining ways to change the payment system from fee for service to paying for quality, outcomes and value.  They can no longer afford even the pre-tax dollar exemption and remain competitive in an increasingly global marketplace.


Cost has always been the primary driver of the American health care system. Whether it is a concern about government intervention in health care, health care inflation or insurance costs and coverage, the key issue for the industry is money and who makes decisions about money. The key for the patient, on the other hand, is “will my health care costs bankrupt me?”

Fear of government interference in rates and charges is at the heart of the industry’s opposition to any changes in the health care system. Business sides with the health care industry on this issue because they both oppose government interference and regulations.  However, changes loom on the horizon. Employers are demanding price transparency and value purchasing. Insurers are backing off that the Affordable Care Act will drive up costs by adding more people to coverage, when the rate increases were not as high they thought they would be. They have much to gain by the Acts expansion of coverage.

Because rates rather than reason dictate our healthcare policy, individual groups are pitted against each other in an attempt to control costs. That the AMA and business would spend collectively $4.5 million dollars to defeat national health insurance in the 1950’s is only one indicator of how deeply they fear government intervention.  Millions were spent by PhRMA (Pharmaceutical and Researchers of America) against the Gore Medicare pharmaceutical proposal in the 2000 election, so drugs would not be managed by Medicare.

What is not widely known is that costs are not considered in clinical trials of medications and medical devices. New drugs and devices are essentially compared against placebos not against comparable drugs or devices. Now some cancer doctors are speaking out against new cancer drugs that cost over $100,000 and refusing to prescribe them. Questions are also being raised about the efficacy of a new cancer proton therapy treatment facility that costs in excess of $150 million per facility with treatment costs at $32,000. Owned by a venture capital firm, the firm’s highest priority is to amortize their investment, whether it is more effective or just as effective as current treatments that are one-third the cost. For drugs and medical devices, the company sets the costs. Payers, such as Medicare, decide how much they will pay.

When greed holds hands with ideology, it is easy for those who do not have an extreme ideological point of view to get lost or shut down in the dialog.  But, when the dialog is ideological, it is almost impossible for those of us in the middle—where most of us are—to make sense of the debates.  It is almost impossible, even for thoughtful people, to make independent decisions given the barrage of assertions on each side about an issue that touches each of us and our families every day.  The proliferation of blogs, TV channels, and websites flood our ‘news’ and media outlets is a quagmire of conflicting information.  Many of these sites do not list anywhere who is behind them.

This is one reason I wrote The Buck Stops Nowhere 12 years ago—to try and provide a baseline that would be understandable to the American public.  The problem of proliferation of misinformation has only become worse and more intense.

The complexity of the system makes health care ripe for fraud.  With a new initiative started in nine cities since 2007 the Health Care Fraud Strike Force of the Centers of Medicare and Medicaid Services has recovered $93 billion in five and a half years.


Perhaps the biggest difference in American health care is that it is a form of employee compensationHealth systems around the world are structured in three basic ways.  France, Germany and Japan, have public and private programs. They have private hospitals and doctors with private practices.  Everyone pays and contributes to the system directly and indirectly: individuals, businesses and the government.  How they organize services differs just as their cultures and government institutions differ.  In France and Germany, the employers pays into a regional non-profit insurance company.  Both individual and employer pay.

In Britain and Italy, the government owns and runs the hospitals and doctors are government employees.

Canada is the loner of this group in keeping private physicians and hospitals, but the government decides how much these private practices and institutions will be paid.

Canada, Britain and Italy keep the employer out of the picture in terms of paying for health care services.

The US diverged from everyone else by making health care benefits a form of employee compensation and part of the terms and conditions of employment.

Employer-centered health insurance emerged in divergent ways. On the one hand, labor unions promoted health insurance and advocated for health benefits to protect their workers against the financial losses they would face if they were sick. Some unions offered benefits and others developed clinics for their members.

In another arena, some large national industries, such as logging, railroads, and mining, offered health coverage for their employees so they could attract employees to these often-dangerous occupations.

The early models of American health insurance focused on selling policies to individuals. Selling to individuals is time-consuming and expensive. An employer-based model solved the insurers’ problem of marketing.  Businesses were offered a natural group of people who were basically healthy enough to work and who would, therefore, be better health risks for insurance.   Insurers feared that individuals will sign up for insurance only when they need it and drop it when they don’t, thus raising the costs for insurers, which is one reason why individual rates are higher than group rates.

Group insurance through employers solved a lot of problems.  On the other hand, the people who are hammered in this approach are retirees who are not yet 65 and eligible for Medicare, small business owners, the self-employed, and the unemployed.  The new health insurance exchanges were developed to solve that problem.

Health care spending increased with the advent of insurance, because insurance paid for the services used. People with insurance could afford to use more services. Add to insurance coverage, the push for more medical research to find cures and new treatments, and the costs were on the rise. People who were not in groups, however, paid a disproportionate share of the costs.  Administrative costs for groups are about 10%, whereas the administrative costs for individuals can be as high as 25-50% because their benefits are different and require much more individual attention for the same services.

Labor unions could use employer-based health insurance as part of their contract negotiations.  Tension exists between labor and management, even though management uses health care benefits as compensation for its employees.  Employers say “we don’t want a uniform benefit package because we use healthcare benefits to attract and retain employees.”

Both groups have been fighting for health benefits in different ways for ages, but for the economic advantage of each group.  By the 1940’s, labor had won the battle to have health care included as part of the “wages and conditions of employment” and therefore part of labor contract negotiation.

By the 1950’s, large employers won the battle to have the IRS Tax Code changed so that money they spent on employee benefits would not be taxed. This means the costs large employers pay for health care premiums are subtracted from their revenue, thereby reducing their tax liability. Something small businesses cannot do.  This created some unintended consequences.

Benefits vs. Wages:  Use it or lose it

During the wage-price freezes after World War II and in the 1970’s, employers were able to offer employees more health care benefits when they could not give raises. Having lived through this in the ‘70’s while I worked at the University of Washington, I saw first hand what happens. It creates a use it or lose it mentality, because health care benefits are perceived as a form of compensation.  Since we could not have raises, the State gave us brand new dental and mental health coverage. Guess what everyone did?  Rushed to dentists and to psychiatrists which we could not have afforded and probably would not have done otherwise. It seemed everyone I knew was getting a crown and seeing a shrink.

This is where the tension emerges between employer and employee. The employer offers the benefits to attract and keep employees, then blames employees for using the very benefits  employers offered.  Neither accountability nor responsibility exist in this approach. In fact, the opposite is true. This produces a game and blame battlefield.

Many problems arise by using health care as a form of employee compensation:

  • First, there is little incentive for employers to give up healthcare coverage, because they receive a wonderful tax advantage.
  • Second, by using health care as compensation, it has made health care benefits part of the terms and conditions of employment and a bargaining issue in labor negotiations and strikes.  Airbus would never be faced with such strikes over employee benefits, but Boeing has numerous times.
  • Third, as a form of compensation, the message is “use it or lose it.”  Like an employee being given a ticket to a ballgame—they may not even like baseball—but now that someone has given them free tickets, they will go to the game because they are getting something essentially for free. If they do not use it, it is perceived as a loss.
  • Fourth, the patient/consumer has been insulated from the cost of care because someone else has been paying the burden of the bill.  This is one reason that the push for price transparency, say for example, showing the difference in cost of an MRI at a hospital vs. a freestanding facility.

Because health care insurance is tied to employment, employees leaving a company often use their benefits more heavily before they leave, because they are not sure whether they will have the same coverage at their next place of employment. The ACA promises to make a significant impact in this area.

Using health care benefits as part of the terms and conditions of employment makes it a cash deal and encourages use, because employees want to make sure they get their fair share.

Separation of Public and Private

We have in place in this country almost everything they have in France, Germany, and Japan.  But we have not tied the public system in any systematic way to the commercial system as a safety net.  We have kept the public system separate from the private.   Instead of working together to set priorities and maximize resources, these systems at best work as tangents. We virtually ignore the wealth and energy of non-profit organizations, such as Diabetes, Heart, Lung, and Cancer Associations, which could provide education and prevention services. We are lost in seas of parallel silo systems.

Where we went really wrong was in focusing health around employers. This means we do not have a clue about what we want as a society for the health and well-being of our residents. IBM and Boeing and the state of California or Alabama decide what they will offer their employees or can wrangle about with the unions, but that is as far as it goes.

Because as a society we lack a vision, we keep tinkering with changes at the edge that are only held together with duct tape and bailing wire.  Consequently, we have no idea of what a health care system should do or how it would be structured.  Both sides fight whatever is proposed for various different reasons. Some hope on the horizon now is the new focus on quality and outcomes, value purchasing, health care exchanges and price transparency.  And finally, there are increasing calls for ending the fee for service system and developing new payment methods and combining all three parts of Medicare.  As well as looking for rational ways to cover long-term care costs other than Medicaid which is the fastest growing cost in state budgets.

Kathleen O’Connor © 2001/2013

I am indebted to Paul Starr’s remarkable book:  The Social Transformation of American Medicine, for the historical data on health care costs and politics, and his chapter on The Mirage of Reform.

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.
This entry was posted in business, Economy, fraud, Health Care Reform, health insurance, health promotioin, policy and politics and tagged , , , , , , , , , , , , , , , , , . Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *