History and Evolution of Health Care Economics in US


Health care has not only been political but also an economic issue dominating most of the world’s agenda in the recent past. In the last forty years, for instance, health care spending has risen rapidly in the global arena and the health sector demonstrated a great deal of rationalization, growth, and organization. The demand for such care is increasing while the supply keeps on deteriorating thereby escalating the health care prices in many economies. According to Dranove (2002), the US health care system has witnessed major political debate since the end of the Second World War and a lot of financial as well as intellectual resources have been made available for the health economics analysis. This branch of economic analysis has since witnessed remarkable evolution since 1931 when the economic matters affecting the profession came to light and the AMA Bureau of Medical Economics was established. Dranove (2002) argues that the cost of providing health care in the US has continued to rise and so is the magnitude of the population that is not insured. This he says has prompted political debates on the health care system in the country with a lot of changes still expected in the sector. For instance, in the early fifties, Truman lobbied for the national health insurance (NHI) followed by the enactment of Medicaid and Medicare in 1965. 1970 also witnessed a major push for the NHI before Reagan’s serious consideration of the NHI plan in 1981. Moreover, Bill Clinton also made such a proposal in 1993 and so did Bush in the subsequent years after the 2004 election. The witnessed escalation in the cost of health care prompted the Obama administration to push for the health care reforms that have seen the government take over the funding of health care funding in the country (Dranove, 2002).

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Health care economics

The rapid technological advancement and intellectual diversity particularly after the Second World War necessitated the development of a formalized health care system in the US as well as the establishment of the medical profession. The health care system in the US has been characterized by great elasticity with demands for care changing in response to the changes in the prices. Firstly, health care financing has been dominated by the individual household’s decision as well as firms’ to allocate the financial resources to the health sector. The study of such behavior may be termed microeconomics. Macroeconomics on the other hand revolves around the government’s decision to take charge of such financing as witnessed in the recent reforms by the Obama administration. Generally, health economics has been a burning issue in the US economy with heightened spending in the health sector contributing to the reduction in the country’s GDP.

History and evolution of health care economics

At the outset, the Health insurance method was adopted in the twentieth century as a means of prepaying health care costs with the AMA taking control of the health marketplace. Health care facilities expanded greatly in the US by 1930 but faced challenges posed by the Great Depression. Consequently, many people could not afford medical expenses. Hospitals later began to adopt financial plans to spread financial risk as well as ensure steady cash flow after the plummeting of hospital receipts between 1929 and 1930. This was later followed by the establishment of Blue cross and commercial insurance in 1932 in Sacramento, California. This insurance plan not only ensured that the hospitals were kept in business by guaranteeing them constant income but also gave the consumers a reliable and predictable method of settling their medical expenses. However, the development of the health care system exposed serious flaws in the plans (Wasley, 1993).

The Blue Shield acquired enormous advantages after being exempted from tax by the federal government courtesy of AMA and the American Hospital Association (AHA) which lobbied for such an undertaking. Consequently, Blue Shield controlled at least forty percent of the entire health insurance market. The Blues later adopted the reimbursement procedure known as the cost-plus which was later utilized by the Medicare program when it became effective in 1965 (Wasley, 1993). According to the plan the hospitals were reimbursed on the percentage of their costs in addition to a fraction of their equity and working capital. It thus allowed the physicians to charge whatever cost they deemed necessary hence increasing the incentives for ‘hospitals. Moreover, the patients too had no restraint due to the fact that the expenses were to be met by the third party and not themselves thereby heightening the general costs of health care (Wasley, 1993).

The health care system witnessed major development in the 1940s with the growth of employer-provided health insurance. Employers initiated a health benefit plan for their employees following the shortage of the latter group in 1942. The institutionalization of the plan was necessitated by the Internal Revenue Service’s ruling that the health insurance for workers could be deducted from taxable income since it was a legitimate cost of doing business and that employees did not have to include the insurance benefits in determining their income. This plan was recognized by the unions which negotiated for it in the contracts. For instance, Chrysler set up a health plan in 1941 with its union that was recently recognized. By 1948 about ten unions had agreed to adopt the health and welfare plans. This plan the number of union workers covered by health plans to 12 million 1955 up from 2.7 million (Wasley, 1993).

In general, the government steered the development of provider-oriented insurance plans that affected health care delivery in the United States. The third-party payment’s inflationary effect ensured that the position of those without the health plans was worsened by the employer-provided insurance. Such plans were succeeded by the first dollar plans which provided tax-free compensation to the users. Workers, therefore, preferred the insurance plan as it ensured routine care coverage. It was thus used to avoid tax and not the normal function of any insurance plan of spreading the risk. Government intervention further brought another problem of experience rating in the health industry since the Blues were exempted from tax requirements and therefore had a competitive advantage over the commercial insurers. The experience rating ensured that a section of businesses was not able to meet the insurance expenses for their employees hence limiting their coverage (Wasley, 1993).

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The growth of employer-provided health care emphasized the health needs of people who lack insurance cover notably the elderly, the poor as well as the unemployed. Consequently, champions of the national health program started to lobby for a government health program in the 1960s hence the establishment of the Medicare program in 1965. The program ensured that the health care industry was dominated by the third-party payment system where either the government or the private health insurance cover the hospital and physician costs of most Americans (Wasley, 1993). According to the program, the medical care for the poor was paid for by the federal and state funds irrespective of their ages. However, the Medicaid and Medicare program inflated the health care prices brought forth by the previous programs including first-dollar coverage and cost-plus reimbursement programs. For instance, the rate of hospital spending increased tremendously between 1965 and 1970 to 15% up from 8.8% betwee1960 and 1965 (Wasley, 1993).

Generally, the cost of health care escalated massively over the past few decades with an increase in personal health care expenditures of up to $2,511 in 1990 up from $82 in 1950. Moreover, Medicare spending grew to $87.6 billion in 1988 up from $25.2billion in 1978. Consequently, the Health Maintenance Organizations (HMO) were established by Congress in 1973 to counter the rising costs in health care in the US. This program had quite a number of regulations which for instance required all firms with more than 25 workers to provide the HMO plans for their employees. It thereafter expanded from three million subscribers in the 1970s to about thirty-five million subscribers in 1991(Dranove, 2002).

Since then, the health care system in the US has witnessed enormous transformations facilitated by the regimes of the periods in question. For instance, Ronald Reagan pushed for the National Health Insurance plan. Moreover, Bill Clinton also made such a proposal in 1993 and so did Bush in the subsequent years after the 2004 election (Dranove, 2002). The witnessed escalation in the cost of health care prompted the Obama administration to push for the health care reforms that have seen the government take over the funding of health care funding in the country. The current health care reforms provide for the financing of such care by the government but the health care delivery can be done either by the government or by the private sector.


Health care economics has been an issue of concern to many people in the US in the recent past. During the last forty years, for instance, the country has witnessed a steady growth in health care spending than any other industrialized nation in the world. Moreover, the United States is the only country that has never had universal health care coverage to its people compared to the aforementioned group of nations. The supply of health care to most Americans has continued to deteriorate as the demand continues to rise day by day thereby contributing to the escalation of the health care prices.

Reference list

Dranove, D. (2002). The economic evolution of American health care: from Marcus Welby to managed care. Princeton: Princeton University Press.

Wasley, T. (1993). Health care in the twentieth century: a history of government interference and protection. Pennsylvania: Vanguard Group Inc. Web.

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