In the News

The Beginnings of Health Insurance

Story by www.ahiphiwire.org

Most people think of health insurance as a modern development. But in fact, since the beginning of civilization people have made arrangements to avoid financial loss because of an accident or illness. For example, in ancient China people paid their doctor while they were well and in return the doctor treated them without payment when they were ill. During the Roman Empire a form of insurance provided income when an accident prevented someone from working. Similar arrangements existed in Europe in the Middle Ages, and beginning in the 17th century there were laws providing sickness insurance for seamen and dismemberment insurance for soldiers. Thus, simple forms of insurance providing some protection have existed for centuries. However, the modern system of health insurance, with its array of coverages began in the 19th century.

Early Accident Insurance

In the mid-19th century, English railroads suffered from bad publicity because of accidents, and railroad management sought a means of alleviating the public's fear of train travel. In 1848, the Railroad Passengers' Assurance Company of London was established to deal with this problem. This company issued the first travel accident insurance. Passengers bought this insurance in the form of an extra stub on their railroad ticket, and in the event of severe injury or accidental death during that trip, they (or their heirs) received a lump-sum benefit. The Railroad Passengers' Assurance Company soon expanded its activities to insure all types of accidents, and other companies followed, both in England and in the United States.

Sickness Insurance

Another early form of health insurance was sickness insurance. Sickness insurance was not the same as modern medical expense insurance, which reimburses the insured for the actual medical expenses she incurs. Sickness insurance was more like disability income insurance, in that it paid a pre-set amount (or a pre-set amount per day) if the insured fell ill, and this benefit was intended not only to pay medical bills but also to compensate for lost income due to inability to work.

The first sickness insurance was issued in the United States in the mid-19th century, about the same time as the first accident insurance, but this coverage did not become widespread until the 1890s. At the time the policies issued were very limited. Companies limited coverage because at that time there were few reliable statistics on the frequency of illnesses. This lack of information made it difficult for companies to accurately estimate the likelihood of a person falling ill, and so it was very difficult for them to know how much they were likely to pay in claims and how much they should therefore charge in premiums in order to be able to pay those claims.  However, as companies gained more experience and gathered more information, they were able to liberalize policies, which eventually covered all diseases and surgical procedures, eliminated waiting periods, and extended the maximum time period of benefits.

Group Insurance

These early coverages were sold as individual policies. The first group health insurance policy in the United States was written in 1910, when Montgomery Ward and Company arranged for an insurer to provide weekly benefits for its employees who were unable to work because of sickness or injury. During the following years many large insurers began to sell group health insurance plans to employers and groups.

Problems of the Early Health Insurance Industry

In the late 19th and early 20th centuries, the business of both accident and sickness insurance grew rapidly. Many new companies were formed, and existing fire and life insurance companies entered the accident and sickness field. However, despite some progress, companies still had insufficient information and experience to accurately predict the incidence of illness and so determine how much premiums should be to cover the costs of claims. Consequently, even those companies that made every effort to charge adequate premiums often miscalculated and were unable to pay full claims.

These circumstances caused many companies to lose money and go out of business, which hurt those insured by them and damaged the industry's reputation for reliability.

Early Government Involvement

State licensing and regulation of insurance had begun in the 19th century, but both legal requirements and supervision by regulators were very limited. This changed with the Armstrong Investigation of 1905. This investigation into the practices of life insurance companies resulted in greater government involvement in all kinds of insurance. Many states enacted new statutes that dictated the provisions of insurance policies and governed the operations of insurers. States also made efforts to more closely supervise the industry to ensure that it was complying with statutes and regulations. A landmark statute of this period was the Standard Provisions Law. This model law, designed to make the operating provisions in health insurance contracts more uniform, was developed by the National Convention of Insurance Commissioners in 1912 and adopted in 27 states.

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