The Birth and Evolution of Modern Day Third Party Payer Healthcare

The 1920s marked a decade full of economic prosperity, seeing dramatic industrial and social changes. The “Roaring Twenties”, as it is often referred, is when many of our modern day luxuries were born. Nearly 40% of Americans owned a radio and national IMG_4314radio broadcasting began. Cars were assembled in mass production, becoming an asset to the working class, and by “1929 there was one car on the road for every five Americans” [1]. The film industry evolved to include color and synchronized sound, women gained the right to vote, and birth control became widely available. The poor enjoyed some of the same indulgences as the rich, and individuals of all ages admired and idolized the fashions and talents coming out of Hollywood. Unfortunately, this era ended as dramatically as it played out with the stock market crash in 1929 leading to the most notable economic collapse of all time – the Great Depression.

It has been nearly a century, and a lot has changed in society and medicine. Take a moment to let it sink in that health insurance has not always existed… There was once a time when there were no limits on pricing for physician services and many practitioners would charge more for care than the average American could afford. A select few would even commit malpractice (some which led to death) to ensure their own salary at the expense of their patients. A farmer could lose his land and his livelihood from an unexpected surgery and individuals typically only received care in an acute setting – when they were sick, injured, or pregnant.

Throughout the twenties, as big business was burgeoning, physicians and hospitals started to realize there was a huge market in healthcare. In 1929 – to protect patients and physicians alike – a few innovative practitioners and health care groups around the country pioneered pre-paid medical plans. These trailblazers included Dr. Michael Shadid of Elk City, OK, Ross-Loos Medical Group in Los Angeles, CA and Baylor Medical Center in Dallas, TX. These plans ensured constant, steady revenue for health care professionals while covering a range of acute, preventative, and specialized services for their members. They were predicted to reduce long-term medical costs for members. This concept was known as managed care – a coordination, organization, and rationalization of the health care delivery in such a way that improve service access and quality while optimizing expenditures. The plans were eventually known as Health Maintenance Organizations, and they flourished during the Great Depression – and thus began health care’s evolution into modern day third party payer healthcare.[2]

In 1929, a number of great minds were thinking alike all across the country. Dr. Michael Shadid began selling shares for $50 per member to build an independent hospital – the Community Hospital. Once construction was complete in 1931, members received discounted medical services for about a year, and then paid an annual premium of $12 per individual or $25 per family of four. Hospitalization cost an extra $1 per day, and surgery was an additional 20 dollars. Even during the hard times of the Great Depression, these prices were reasonable (going rates: $150 for an appendectomy and $50 for a tonsillectomy). By 1936, the hospital was serving over 2,400 families and thriving with the support of local farmers and political backing. [3]

During the same year halfway across the country, a duo of physicians, Donald E. Ross and H. Clifford Loos, formed Ross-Loos Medical Group to provide prepaid healthcare services to over 2,000 employees of Los Angeles County and the Department of Water and Power and their families. The plan focused on quality and prevention, and included such services as prenatal and well-baby visits and immunizations. Members paid $1.50 per month for this plan, which eventually became CIGNA. In the south, Justin Ford Kimball was also developing a prepaid healthcare plan for Baylor Hospital in Dallas, Texas to provide hospital services to nearly 1,500 teachers at the university. This plan eventually evolved into Blue Cross hospital services and within 10 years Blue Shield plans were developed to cover physician services. Combined these plans provided coverage to over 10 million individuals nationwide.3,[4]

As competing physicians and medical societies caught wind of these innovative plans, there was outcry in the medical community. The American Medical Association (AMA) adopted a strong opposition to prepaid group plans. They evoked fear in many health care professionals, threatening to suspend licenses of those who joined group practices. Local medical societies pushed to expel associated practitioners from their professional groups and prevent them from practicing at local hospitals. Competing physicians feared they would be forced to compete by providing services below cost. Many were deterred from participation, but not the reformers. Physicians brave enough to join group practices longed to see equal medical care for all Americans.

According to research published in 1932 by the Committee on the Costs of Medical Care (CMCC) – a group of 49 respected leaders in healthcare, including physicians, dentists, pharmacists, nurses, public health administrators, experts in medical economics, etc. – every dollar spent in health care broke down as 30% to physicians, 23% to hospitals, and 18% to medicines; there was misdistribution of health care – lower incomes equated to less medical care; and due to only a small percent of the public able to afford services, the average general practitioner had a low income. They recommended the expansion of prepaid group practice, encouraged continuing education and training, and emphasized a focus on patient-provider relationships, preventative care, and quality assurance. They took the stance that health care should be the “right” of every American, and if individuals could not afford monthly premiums, the government should provide subsidies.[5] In 1947, the U.S. Supreme Court upheld a ruling against AMA for violating the Sherman Antitrust Acts, by ostracizing physicians who participated in group plans, eventually leading way to increased participation of physicians in group plans and expansion of third party payer plans.[6]

By 1955, their dreams were becoming reality with nearly 70% of the U.S. population enrolled in health insurance plans. In 1965, Medicaid was established to further increase access to care for low-income families, and over the next several years expanded to incorporate new plans for children under the age of 21, elderly, and physically and developmentally disabled populations. The Healthcare Maintenance Organization (HMO) Act of 1973 was specifically designed to increase market competition and reduce healthcare costs while also increasing access and coverage. Amendments over the next 20+ years increased emphasis on quality care and accountability. By 1982, every state offered Medicaid services, patients gained more freedom in healthcare choices, and hospitals providing care to impoverished populations received state compensation. By 1990, Medicaid continued to grow, providing eligible women with prenatal care, covering certain health emergencies for illegal immigrants, and including dental benefits for many members.[7]

The development of Preferred Provider Organizations (PPOs) and Point-of-Service (POS) care in the 1990s, increased choices of healthcare providers and cost management for members. With the implementation of the Omnibus Reconciliation Act of 1990, Medicaid created a drug rebate program to help cut medication expenses. By the turn of the century, privacy laws were enacted as the Health Insurance Portability and Accountability Act (HIPAA) was enforced nationwide, Children’s Health Insurance Program (CHIP) was established to include children in families with higher income brackets, and the federal government was mandating that care be provided to all uninsured women diagnosed with breast or cervical cancer, regardless of income.6

In March of 2010, President Barack Obama signed the Affordable Care Act into law, which includes two legislative acts – Patient Protection and Affordable Care Act (PPACA) and the Health Care and Education Reconciliation Act of 2010. This legislation encourages health insurance reform to expand coverage and quality while increasing accountability, controlling costs, and ensuring increased choices for consumers. It organized the Health Insurance Marketplace to provide a streamlined application process for affordable government approved insurance programs with eligibility determined through this single process. There is a strong focus on preventative care and an increase in program transparency and integrity. In 2011, state grants were approved to increase access to long-term care services and supports within a member’s local community. In 2014, new policies were released to extend funding in order to increase eligibility for CHIP through 2015 and increase federal matching rates until 2019. Centers for Medicaid and Medicare Services enacted new laws to upgrade existing CHIP eligibility.[8]



Western Clinic in Tacoma, WA offered medical services through select providers, for $0.50 per month for lumber mill owners and their employees, to ensure steady revenues for the clinic. (First example of managed care)


First medical co-op: Michael Shadid organized the Rural Farmers Cooperative in Elk City, OK

First Health Maintenance Organization (HMO): Ross-Loos Medical Group was formed to provide prepaid healthcare services to over 2,000 employees of Los Angeles County and the Department of Water and Power and their families

Baylor Hospital in Dallas, Texas develop a group health plan to provide hospital services to nearly 1,500 teachers at the university


American Medical Association adopted strong opposition to prepaid group plans

The Committee on the Cost of Medical Care (CCMC) published findings on the benefits of HMOs, recommending the expansion of prepaid group practice


The Kaiser Foundation Health Care Plans were initiated to finance medical care for the Kaiser construction company employees

The Home Owner’s Loan Corporation organized Group Health Association (GHA) in Washington D.C. to assist families with medical expenses in order to decrease the number of foreclosures


During World War II, several new HMOs were established by employers to provide employee health benefits in order to increase employment rates

A number of state medical societies develop Blue Shield plans, as adjunct to Blue Cross plans, to cover physician services


Health Insurance coverage is less than 10% nationally


The Health Insurance Plan (HIP) was founded to provide coverage for New York City’s city workers.


The Group Health Cooperative of Puget Sound was organized by 400 families in Seattle (First consumer-founded prepaid medical co-op)

AMA convicted of violating the Sherman Antitrust Acts by ostracizing physicians who participated in group plans – upheld by the U.S. Supreme Court


San Joaquin Medical Foundation was established to compete with the Kaiser Foundation Health Care Plans. They were the first independent fee-for-service model licensed by the state of California to receive capitation payments.


Health Insurance coverage is nearly 70% nationally


Medicaid was established under the Social Security Act of 1965


Amendments were made to the Public Health Service Act to promote and assist in the extension and improvement of comprehensive health planning and public health services, to provide for a more effective use of available Federal funds for such planning and services, and for other purposes.[9]


The Early and Periodic Screening, Diagnostic and Treatment (EPSDT) Plan was developed by Medicaid for children under the age of 21


Medicaid started to cover intermediate care for patients with intellectual disabilities

Supplemental Security Income (SSI) Benefits were established to provide assistance to elderly and disabled


The Healthcare Maintenance Organization (HMO) Act of 1973 was specifically designed to reduce healthcare costs by increasing market competition, increasing access to care and focusing on preventative care. Amendments over the next 20+ years increased emphasis on quality and accountability


Medicaid increased flexibility and freedom for patients to select their own health care team

Each state was required to pay hospitals that provided services to low-income patients


Arizona became the last state to provide Medicaid services


Eligible pregnant women covered for medical services associated with pregnancy


Medicaid covered emergency medical care for illegal immigrants (situational)


Dental services were added to benefits provided by Medicaid (not all states provide this benefit)


The development of Preferred Provider Organizations (PPOs) and Point-Of-Service (POS) products increases choices of healthcare providers and flexibility to manage costs for members

Omnibus Reconciliation Act of 1990 passed to help control prescription drug costs


January 1st, Medicaid Drug Rebate Program goes into effect in response to Omnibus Reconciliation Act of 1990


The Health Insurance Portability and Accountability Act (HIPPA) guarantees insurance portability and personal privacy for all Americans


Children’s Health Insurance Program (CHIP): by the US Department of Health and Human Services, develop benefit solutions to bridge the gap that left millions of American children uninsured in families with incomes that are modest but too high to qualify for Medicaid


2000 Breast and Cervical Cancer Treatment and Prevention Act provides coverage opportunity to any uninsured woman, regardless of income, upon diagnosis of breast or cervical cancer


Consumer Directed Health Plans (CDHP) begin to develop, enabling Blue Cross and Blue Shield members to have more personal control over the amount they spend on their own healthcare. This starts a movement towards empowering individuals to be more actively involved in their healthcare decision-making


President Barack Obama signed the Affordable Care Act (PPACA) into law. Companies partner with doctors, nurses, hospitals and others to rein in costs, improve quality, help people stay well and better manage their care


State grants were approved to increase access to long-term care services and supports within a member’s local community


New policies released to extend federal funding in order to increase CHIP eligibility through 2015 and increase federal matching rates until 2019


Medicaid Managed Care in Missouri expands to statewide coverage

Blue Cross and Blue Shield companies cover nearly one-in-three Americans, in every zip code in every state and Federal Territory.

[1] The Roaring Twenties. Accessed July 20, 2015.

[2] Kongstvedt, Peter R. Managed Care: What it is and how it Works. 3rd ed. Sudbury, Mass.: Jones and Bartlett, 2009. Web.

[3] Dr. Shadid’s Maverick Medicine. World History Group. Accessed July 21, 2015.

[4] Ross-Loos Medical Group. World Heritage Encyclopedia. 2014. Accessed July 21, 2015.

[5] Smith, Charles C. The Committee on the Cost of Medical Care – Presented to the Innominate Society for the Study of Medical History on April 10, 1984. Accessed July 22, 2015.

[6] Mullner, Ross M. Encyclopedia of Health Services Research. Accessed July 25, 2015.

[7] Medicaid History. Centers for Medicare and Medicaid Services. Accessed July 23, 2015.

[8] Affordable Care Act. U.S. Department of Health and Human Services. Accessed July 24, 2015.

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