Prior to 1920, the state of medical technology generally meant that very little could be done for many patients, and that most patients were treated in their homes. Table 1 provides a list of pioneering early advances in medicine. Hospitals did not assume their modern form until after the turn of the century when antiseptic methods were well established. Even then, surgery was often performed in private homes until the 1920s.
Table 1: Milestones in Medical Technology
| 1850-1870: Louis Pasteur, Joseph Lister and others develop understanding of bacteriology, antisepsis, and immunology. 1870-1910: Identification of various infectious agents including spirochaeta pallida (syphilis), typhus, pneumococcus, and malaria. Diphtheria antitoxin developed. Surgery fatality rates fall. 1887: S.S.K. von Basch invents instrument to measure blood pressure. 1895: Wilhelm Roentgen develops X-rays. 1910: Salvarsan (for syphilis) proves to be first drug treatment that destroys disease without injuring patient. 1920-1946: Insulin isolated (1922), sulfa developed (1935), large-scale production of synthetic penicillin begins (1946). 1955: Jonas Salk announces development of vaccine for polio. |
Medical Expenditures Initially Low
Given the rudimentary state of medical technology before 1920, most people had very low medical expenditures. A 1918 Bureau of Labor Statistics survey of 211 families living in Columbus, Ohio found that only 7.6 of their average annual medical expenditures paid for hospital care (Ohio Report, p. 116). In fact, the chief cost associated with illness was not the cost of medical care, but rather the fact that sick people couldn't work and didn't get paid. A 1919 State of Illinois study reported that lost wages due to sickness were four times larger than the medical expenditures associated with treating the illness (State of Illinois, pp. 15-17). As a result, most people felt they didn't need health insurance. Instead, households purchased "sickness" insurance -- similar to today's "disability" insurance -- to provide income replacement in the event of illness.1
Insurance Companies Initially Unwilling to Offer Health Insurance Policies
The low demand for health insurance at the time was matched by the unwillingness of commercial insurance companies to offer private health insurance policies. Commercial insurance companies did not believe that health was an insurable commodity because of the high potential for adverse selection and moral hazard. They felt that they lacked the information to accurately calculate risks and write premiums accordingly. For example, people in poor health may claim they to be healthy and then sign up for health insurance. A problem with moral hazard may arise if people change their behavior -- perhaps engaging in more risky activities -- after they purchase health insurance. According to The Insurance Monitor, "the opportunities for fraud [in health insurance] upset all statistical calculations.... Health and sickness are vague terms open to endless construction. Death is clearly defined, but to say what shall constitute such loss of health as will justify insurance compensation is no easy task" (July 1919, vol. 67 (7), p. 38).
Failure of Compulsory, Nationalized Health Insurance
The fact that people generally felt actual health insurance (as opposed to sickness insurance) was unnecessary prior to 1920 also helped to defeat proposals for compulsory, nationalized health insurance in the same period. Although many European nations had adopted some form of compulsory, nationalized health insurance by 1920, proposals sponsored by the American Association for Labor Legislation (AALL) to enact compulsory health insurance in several states were never enacted (see Numbers 1978). Compulsory health insurance failed in this period for several reasons. First, popular support for the legislation was low because of the low demand for health insurance in general. Second, physicians, pharmacists and commercial insurance companies were strong opponents of the legislation. Physicians opposed the legislation because they feared that government intervention would limit their fees. Pharmacists opposed the legislation because it provided prescription drugs they feared would undermine their business. While commercial insurance firms did not offer health insurance during this period, a large part of their business was offering burial insurance to pay funeral costs. Under the proposed legislation, commercial firms would be excluded from offering burial insurance. As a result, they opposed the legislation, which they feared would also open the door towards greater government intervention in the insurance business.
