This column is devoted to history illustrated by vintage postcards, photographs, and ephemera. Here I focus on the history of hospital financing which is a concept. They didn’t print postcards illustrating concepts so I’ve done my best in illustrating this topic.

This column is devoted to history illustrated by vintage postcards, photographs, and ephemera. Here I focus on the history of hospital financing which is a concept. They didn’t print postcards illustrating concepts so I’ve done my best in illustrating this topic.

I have recently been treated in an emergency room followed by five days in OU Hospital at a total cost of about $10,000 a day--almost all of which was covered by Blue Cross and Blue Shield [BCBS]. What follows is a brief description of how our health care services financing system evolved.


Everything began in 1929 when Dallas teachers contracted with Baylor University’s hospital to provide 21 days hospital care for 50 cents a month ‘dues.’ Blue Shield followed in Buffalo in 1930. The two “Blues” plans cooperated to form BCBS. The father of one of my best friends, Dallas neurologist Dr. Jonathan Walker, was in 1930 a Baylor med student from Buffalo, Oklahoma who became the nation’s first BCBS salesman. By 1940, membership of the Blues was 10 million and would grow to cover much of the nation’s work force and the template for our nation’s health care financing system.


With many men in military service during WWII, labor was scarce so women went to work in factories becoming “Rosie the Riveters.” Norma Jeane Dougherty [Mrs. James] worked in the original drone factory in Van Nuys, California. She was spotted by a photographer, left the factory and James in 1945 and changed her name to Marilyn Monroe. The Office of Price Administration OPA] regulated pay and prices. To attract workers factories offered fringe benefits like health insurance and pensions. By war’s end BCBS was standard in most compensation packages. Thus, health care insurance employment became the nation’s method of financing health care. It happened because an obscure government agency [OPA] failed to consider—and thus control--health insurance as part of compensation .

BCBS included three features that would lead to problems. First, it established the precedent of funding health care through private insurance. Second, one obtained health insurance primarily through employers which excluded the unemployed. Third, it lacked features required of any free market system e.g., competitive pricing or government regulation.


From the thirties until 1966, health care services were financed primarily at full cost by BCBS. They paid retroactively based on our financial statements. In addition to inflation, the addition of new technology and construction of hospitals financed by the Hill Burton Act of 1946 increased hospital costs. The feds paid two-thirds of the cost and States one-third. In return, hospitals were required to provide some free care to the poor for 20 years. When the States did not contribute their share, hospitals were unable to provide the free care..

The end of OPA price and wage controls at the end of WWII was followed by roaring inflation which included the health system. [One Saturday at war’s end the price of my haircut had been increased 50% from $0.50 to $0.75! In 1930 physicians earned twice the national per capita income and the health care system consumed 4% of GDP. Today, physicians average more than four times the national average per capital income and the nation’s health bill is 18% of GDP. [It should be added that in this interval physician education doubled in duration and cost.]

When I went to work in Stillwater Municipal Hospital in 1959, my BCBS dues were $4.50 a month which increased to $6.50 when I married. Hospitals enjoyed a local monopoly. We colluded in setting our prices [“charges”] and especially in setting nurses’ pay. [At meetings, hospital CEO’s compared and set RN salaries.] As monopolists, we didn’t meet prices, we set them. There was no safety net for unemployed persons without health insurance and no government coverage. We hospitals had to write off a lot of charity care.


In 1965 the federal government finally intervened by creating Medicare for the elderly and Medicaid for the indigent. They reimbursed providers cost plus a 4% profit. It was the a cost-plus system like that which enriched industry during WWII. I worked well for us also because of its simple formula e.g., higher costs = more profits. Predictably, health care costs spiraled out of control.


In the mid-seventies Social Security funded six research studies to find a way to control hospital costs. I directed one of them in 33 Michigan hospitals. This ended cost-plus hospital reimbursement by putting them on a budget. One hospital administrator in my research project bragged that his actual costs never varied from his budget by more than 1%! Finding this remarkable I asked his secret. Every month he asked all his department heads if they had left out any costs in their budget which, if they had, he promptly added to their budget! [By mere chance, I had found the only Democrat living in ultra-conservative southwestern Michigan.]

The Rest of the Story

Subsequently, much state and federal effort has gone into reversing the omissions in 1930 BCBS. Employers have shifted health insurance costs to employees by asking them to pay more of the cost of their health insurance and reducing the benefits covered by reducing coverage and increasing deductibles and co-payments. [1] They have matched the monopoly power of providers by increasing the monopsony power of those purchasing health insurance.


[1] Hacker, Jacob, “The Great Risk Shift,” Oxford University Press, 2008.