To understand the structure of American health insurance, we also need to go back to the 19th century. It was then that in remote rural locations, employers began to offer their workers coverage. Loggers out in the woods of the Northwest, miners in various rural areas got their health insurance from their employer. And then in the early part of the 20th century, the Depression forced a real change. Because of the Depression, lots of Americans were not able to afford healthcare. Use of the hospital went down. In 1929, Baylor University in Dallas Texas offered teachers a deal. They would provide 21 days of hospital care per year for a six dollar premium. Many people date the founding of health insurance in America to this action by Baylor. Many people considered the Baylor experiment in Dallas, the birth of health insurance in America. The idea quickly spread to other cities and other hospitals across the country. Actually, many hospitals in the city would combine and offer an insurance product, so the individual patient could decide and choose between the hospitals. This idea led, in 1939, to the creation of Blue Cross. They were tax exempt insurance plans based at the state level. The states actually provided them an advantage in that they didn't require financial reserves because the insurance plan would guarantee service at a hospital. And in return, the Blue Cross plans community rated. They charge everyone, regardless of their health condition or their age, the same price. Health insurance then proliferated because commercial insurance got into the game. They had traditionally avoided health insurance for a variety of reasons. The first is, they were worried that only the sick would buy. The second is, they could not figure out how to define health and how to define sickness in a way that would make sense and would not open them up the fraud. Blue Cross plans showed the way. In addition, the commercial or for-profit insurance companies had several advantages. First, they could offer one stop shopping to an employer. They could package health insurance with life insurance and other products. Second, they weren't tied to a particular state or geography. They could give it national coverage to big companies. And most importantly, they did not community rate. They offered lower prices to employers that had healthy, low risk workers. And this created a tension between the commercial for-profit insurers and the not for-profit Blue Cross plans. A third way of getting private insurance was managed care organizations like Kaiser. Henry Kaiser was an industrialist who made ships and steel out on the West Coast for the United States during the war. And in 1942, he set up a health insurance plan for his workers. The plan actually provided comprehensive healthcare services to all the employees. Actually, Kaiser health plans owned its own physicians, employed them, and actually owned its own hospitals. So they provided comprehensive managed care for its workers. Doctors were very suspicious of all of this insurance. And actually, when Blue Cross started, doctors resisted. But several things made them change their mind. The first and most important was the Depression and a decrease in their income. Second, the commercial insurers came in and they packaged payment to the hospital with payment to the doctors who worked in the hospital such as surgeons. And this made the doctors worried that they would be cut out. Finally, doctors had figured out a way, so that the insurer would not become between the doctor and the patient, that the payment would go directly to the patient, who would then pay the doctor. So, physicians, through their state medical societies, came up with Blue Shield plans, and this physicians control those plans. Over the 1940s and 50s, health insurance became much more important for two reasons. First, healthcare costs were rising. With greater use of hospitals, the more things hospitals could do, cost at hospitals became more important. Second, as we mention, the tax exclusion encouraged employers to provide health insurance to their workers. In 1942, the wage and price controls were set in place, but the government ruled that employers could provide health insurance to their workers equal to five percent of wages and it not be considered a violation of the wage limit. Employers began using health insurance to attract more workers. Employer sponsored coverage, then got a big boost in 1954 when Congress rule that health insurance was not to be considered part of income for determining taxes. In this way, it became advantageous for employers to give their workers health insurance because they would not be taxed on that health insurance and so, it became a very valuable fringe benefit. If health insurance is tied to your employer, who gets left out of that system? Next, we're going to look at public payment for healthcare and covering all those people not covered by employer-sponsored health insurance.