During the post-WWII period, when most policymakers had accepted capitalism but nonetheless engaged in robust battles over where to draw the boundaries of that system, trade and professional associations provided a critical nexus connecting political conflict, social objectives, and market structure.Footnote ¹ Politicians and federal administrators shaped the economy not only through formal rules and regulations but also through informal authority, using policy debates to influence consumer values and producer goal-setting. Trade and professional associations acted as two-way conduits that allowed private interests, in one direction, to influence political agendas and, in the other direction, to translate lessons learned from the federal political realm into marching orders that guided ground-level market organizations.Footnote ²

In the case of health care, the American Medical Association (AMA), which represented physicians, and the Health Insurance Association of America (HIAA), which represented for-profit insurance firms, pursued political strategies that created a distinct approach to “private” medical care—a high-cost, corporate model based on insurance-company funding and management.Footnote ³ Financing care through insurance-company products has become so deeply embedded in health care provision that many scholars have forgotten that other paths were possible.Footnote ⁴

During the first half of the twentieth century, insurance-company funding was but one model in an assortment of private approaches to prepaid health care. However, AMA leaders feared the corporate organization of medicine and fought all financing experiments. Calls for federal health care reform during the 1930s and 1940s finally forced organized physicians to soften their resistance to all forms of medical prepayment. The AMA approved health insurance, but only plans underwritten by insurance companies.Footnote ⁵

Despite the growth of voluntary insurance, private interests faced a politically hostile atmosphere because most federal policymakers (not to mention insurers themselves) recognized that insurance-company financing was inherently expensive. Nor did the political pressure subside with the defeat of Harry Truman's plan for a universal, federally managed health system. Contrary to narratives claiming that private interests vanquished Truman's plan by 1950 and then rode off for the green pastures of Eisenhower's two terms, organized physicians and insurance companies continued to battle reform proposals from elected officials on both sides of the ideological divide.Footnote ⁶ Democrats and Republicans offered “compromise” reform measures that threatened AMA and HIAA members by promoting alternative forms of health care financing or by introducing federal insurance regulation.Footnote ⁷

As diverse groups of policymakers searched for ways to make health insurance more efficient and equitable, they advanced a consumer ideal for wide-ranging, generous benefits and promoted a social expectation that pointed towards universal or, at the very least, mass coverage.Footnote ⁸ In this way, politicians signaled to private interests the most effective way for them to obstruct reform proposals: AMA and HIAA leaders attempted to demonstrate that they could meet social goals without federal reform by rapidly developing organizational capacity around the commercial-insurance model.

Thus, insurers transformed health coverage from a product for a select few into a mass consumer good. Moreover, insurance industry leaders ignored actuarial forecasts that warned of skyrocketing costs in order to convert their product from a restricted device that partially paid hospital bills into a mechanism for covering almost all costs associated with medical care.

The dramatic expansion of health insurance rippled through the development of ground-level market organizations. AMA and HIAA leaders instructed their members—constituent medical societies, physicians, and insurance firms—to create overlapping institutions that could negotiate the increasingly intimate funding relationship between financiers and health care providers.

The market's institutional build-up highlighted the fact that insurers and physicians had conflicting economic roles. Rapidly rising medical costs compelled insurers to wade deeper into system operations and, ultimately, to extend their authority over health care delivery: underwriters became experts in the practice of medicine, introduced cost-containment measures, and established a supervisory function, albeit weak, over physician work. In this way, insurance companies expanded their role from merely underwriting the risks related to medical services consumption to also managing the health care system. Just as they had feared, physicians found themselves participating in a pseudocorporate framework that increasingly limited their professional autonomy.

The widening economic rift between insurance company and physician interests altered the HIAA–AMA political alliance. The costs associated with broad coverage and generous benefits forced insurance company executives to reconsider their enthusiasm for extending private coverage to all population groups. HIAA leaders maintained their political partnership with the AMA and officially opposed federal programs for aged insurance; however, they failed to mount energetic resistance to Medicare.

By the time the government formally intervened in health care to cover the elderly in 1965, an economic model with substantial cultural legitimacy already existed. Recognizing Americans' long-standing aversion to explicitly statist action and the weak capacity of federal agencies or, more plainly, that the public sector had lost the organizational development race to private actors, policymakers turned their back on programs that would have given a robust role to federal management and instead created a program that harnessed existing market structures.Footnote ⁹ Policymakers designed Medicare around the insurance-company-funded model that had previously been so contested. The federal program adopted the institutional arrangements that insurers had already created, including the same cost-containment practices (or lack thereof). Insurance companies also secured an intermediary role between the government and service providers, institutionalizing their position as managers of the public-private health care system.

This analysis employs insights from the organizational synthesis literature to illustrate the mechanisms of path dependency in America's mixed economy: AMA and HIAA leaders converted messages from the federal political sphere into instructions for how member-organizations should develop the market.Footnote ¹⁰ Because of what Jacob Hacker terms the “subterranean” or obscure nature of politics animating certain categories of U.S. social welfare policy, it is necessary to peel back developmental layers in order to trace how formal and informal political authority led to “institutional thickening” around a particular voluntary model. This story's critical juncture occurred when the AMA chose to obstruct federal reform proposals by promoting not all forms of voluntary insurance, but only insurance-company-financed products. In spite of the efficiency and cost problems inherent in such arrangements, increasing returns occurred because insurers and physicians believed that the model offered the most protection for their financial, professional, and political interests. Ironically, political attempts to supplant insurance-company financing created a feedback loop that encouraged institutional reproduction around the contested model.Footnote ¹¹

In refashioning the way health insurance was commodified and organized, the AMA and HIAA employed varying political, organizational, and economic approaches. I borrow from Elisabeth Clemen's concept of “organizational repertoires” to demonstrate the importance of each association's strategy and structure in occupying a position of influence on the bridge connecting state and society.Footnote ¹² HIAA leaders more successfully adapted their association to the existing political institutional framework and to their social identity as “big business.” While the AMA waded into messy, widely broadcast political battles over every reform proposal and frittered away political capital and professional prestige on issues that seemed tenuously related to medicine, HIAA leaders, believing that corporations possessed little cultural influence, purposely lobbied legislators behind the scenes. This strategy allowed insurance companies to avoid negative publicity.

Scholars have attributed much of the AMA's ability to thwart a government-managed healthcare system to the association's federated arrangements.Footnote ¹³ The AMA's decentralized structure, with a national organization encompassing state and county constituent societies, soon proved a liability as organized physicians struggled to find a unified voice on political and economic matters. HIAA leaders, in contrast, employed a centralized, hierarchical bureaucracy to reduce interfirm competition and rapidly organize the market around insurance-company products.

Organized physicians, after failing to win their high-profile battle against Medicare, squandered much of their remaining political authority and steadily lost professional autonomy as insurers and federal administrators increased their supervision over medical services delivery. HIAA-members' ability to successfully adapt to the political environment and their role as the medical system's financiers helped them acquire political influence and enhance their economic position.

In addition to helping structure a large portion of the economy, the HIAA's organizational repertoire illuminates the contours of postwar American capitalism. Cultural and social patterns were consolidated into a framework that reflected the dialogue between private institutional development and informal political authority, with the possibility of formal state intervention. It is a framework that has favored private interests that deploy quiet political influence and that possess the financial weight to sculpt market arrangements according to politically enunciated goals.

Choosing the Voluntary Model

During the early twentieth century, organized physicians thwarted modernization in the health care market. AMA leaders opposed both doctor groups and insurance on the grounds that they could develop into corporate organizations that would place doctors under lay supervision. The AMA fought physician groups that allowed patients to prepay set fees in return for care whether they were managed by unions, corporations, consumer groups, or even doctors themselves.Footnote ¹⁴ Association officials frustrated innovative experiments by punishing doctors who participated in them: organized physicians dominated state regulatory boards and hospitals, thus permitting them to revoke the licenses and hospital admitting privileges of doctors who challenged AMA professional norms.

Political pressure during the 1930s and the 1940s compelled AMA leaders to appear more conciliatory toward private market development. The AMA approved health insurance but only policies underwritten by insurance companies or nonprofit Blue Cross and Blue Shield plans. The AMA continued opposing doctor groups or insurance coverage financed by any other organization. When wartime wage freezes and tax incentives spurred businesses to purchase employee benefits, insurance companies had the requisite financial reserves to fund health services for national groups. Most importantly for AMA leaders, insurance companies paid physicians on a fee-for-service basis: by avoiding per-patient capitation payments and set salaries, insurance companies signaled that they had no intention of interfering in the practice of medicine. Thus, out of the numerous possible models for arranging private health care, the AMA decided that insurance-company financed coverage would dominate the market.

Insurance executives, however, harbored concerns about the risks involved in underwriting medical services. The principle of moral hazard states that an activity cannot be profitably underwritten if the subscriber can control frequency of use. Not only could patients request unnecessary services, but insurance companies lacked the authority to supervise physicians. Doctors had an incentive to provide as much care as possible because a distant third-party paid the medical bill.Footnote ¹⁵ To limit financial losses associated with moral hazard, insurance companies initially only offered hospitalization coverage or major medical policies that reimbursed subscribers a percentage of costs after they paid a large deductible.

AMA leaders wholeheartedly supported commercial insurers' conception of insurance as a restricted mechanism. Believing that he “who pays the bill calls the tune,” organized physicians hoped to severely limit prepayment plans in order to protect doctor autonomy and limit insurance company influence over health care.Footnote ¹⁶

The Postwar Political Environment

Most policymakers recognized the cost problems associated with third-party-funded insurance that failed to integrate the financing and delivery of care. Reformers on the ideological left argued that insurance companies would never be able to cover a large portion of the population and that only a government-managed program could deliver comprehensive benefits to all citizens at reasonable costs.Footnote ¹⁷ Policymakers in both parties were receptive to such concerns about private market capacity because of what Lizabeth Cohen identifies as a dominant postwar political approach for “reconstructing the nation's economy and reaffirming its democratic values through promoting the expansion of mass consumption.”Footnote ¹⁸

Alan Brinkley bemoans the “end of reform” when left-leaning policymakers abandoned attempts to restructure the economy and settled, instead, for a vigorous welfare state paired with Keynesian policies that would strengthen capitalism by countering producer and consumer spending cycles.Footnote ¹⁹ Still, the New Deal created a tectonic change in American political thought that redrew the outlines of postwar political contests. Postindustrialist thinkers lost their campaign to reconstruct American markets but, nevertheless, set the terms of the debate by reconceptualizing the economy: most policymakers now viewed the market not as a distinct self-regulating sector, but as a tool for creating moral social relationships.Footnote ²⁰

Health care reform offered a well-lit avenue for politicians employing economic policy to effect social cohesion. Left-leaning reformers sought universal care to encourage citizen equality whereas moderates and conservatives hoped to grease the wheels of the private market to prove America's superior capacity to deliver consumer goods. On the left, many policymakers accepted Arthur Schlesinger's vision of the “vital center,” which evinced nostalgia for the New Deal when Americans fought both the Nazi right and communist left with forceful government programs that “had a positive and confident ring.” Schlesinger, like many on the left, lamented the way that celebrations of consumption had flattened American culture. He believed, however, that deradicalizing the masses with a political economy that permitted citizens to “read comic strips, go to movies, play slot machines and patronize taxi dance halls,” would reduce the polity's susceptibility to totalitarianism.Footnote ²¹

To the right of Schlesinger were southern Democrats and northeastern Republicans who, under various labels and iterations, largely accepted Eisenhower's conception of the “Corporate Commonwealth.” Under this brand of Keynesian ideology, a modicum of government direction would help businesses blend the efficiencies of capitalism with the concerns of social responsibility.Footnote ²²

Taft conservatives and their allies among AMA and HIAA leaders recalled a traditional economic order not only by opposing the left's program for welfare state expansion and economic redistribution but also by attacking moderate notions that imagined expert policymakers gently prodding private groups along toward greater social justice.Footnote ²³ Indeed, fear of politicians harnessing the “private” market was what drove the AMA's earlier resistance to financing experiments and its continuing fear of expanded insurance coverage. AMA leaders believed that concentrating economic power within corporate organization would only make it easier for government officials to bend the market toward social ends.Footnote ²⁴ Taft Republicans decried America's “creeping socialism” but found themselves largely outside the policymaking mainstream.Footnote ²⁵

Within this political contest to define American capitalism, politicians offered numerous proposals to reform health care. Truman's health care plan envisioned the polity as a collection of consumers, made equal by their participation in a federally managed insurance fund. Citizens would pay monthly premiums in exchange for coverage, and public agencies would purchase premiums for the poor. By centralizing the plan under federal management, policymakers would deliver equity and efficiency, far surpassing the meager benefits offered by commercial insurers and their allies in organized medicine.Footnote ²⁶

Truman's plan for a federally managed, universal health care program was dead by 1950; yet private interests continued to face a hostile political atmosphere. Moderate Republicans and Democrats offered “compromise” reform proposals not only to obstruct future attempts to create a government-managed system but also because they accepted reformers' criticism of voluntary insurance and doubted that the developing market could meet consumer expectations. Third-party-financed insurance was simply too expensive for large swaths of the population including the poor, elderly, and chronically ill.

Insurers found themselves targets of “reverse” federal lobbying, under which policymakers urged them to accept subsidies in order to broaden coverage.Footnote ²⁷ President Eisenhower introduced a reinsurance plan to provide federal payments to insurance companies when they incurred losses on high-risk subscribers, but government money came with regulatory strings attached. Recognizing that the program would introduce federal oversight and possibly lead the government to underwrite and manage all health care coverage, organized physicians and insurance leaders opposed and defeated the measure.Footnote ²⁸

Other legislators sought funding for prepaid group practice. Because they reimbursed physicians with a salary or per-patient capitation fee, reformers believed that prepaid groups would reduce health care costs.Footnote ²⁹ The centerpiece of the famed 1932 Committee on Costs of Medical Care report was a recommendation that doctors establish prepaid groups in order to organize the health care market more efficiently.Footnote ³⁰ Labor leaders promoted group practice and established union welfare funds that paid doctors a salary in exchange for supplying unlimited services to their members.Footnote ³¹ In 1952, Truman's Commission on the Health Needs of the Nation, established to find bipartisan compromise on reform, recommended federal subsidization of prepaid groups. The 1955 Wolverton-Kaiser bill sought federally insured loans to encourage physician groups to purchase medical facilities. Although prepaid groups, such as Kaiser-Permanente and the Group Health Association, amounted to less than 10 percent of total insurance coverage during the 1950s, their existence provided a counterpoint for reformers who believed that the market lacked efficient organization.

Proposals to fund prepaid plans failed to gain political traction. As with Eisenhower's reinsurance plan, prepaid organization left too much power in the private sector for left-leaning policymakers whereas right-leaning politicians divided between those favoring alternative reforms and those allied with commercial insurers and organized physicians. The HIAA opposed subsidization of their competitors and the AMA continued to reject doctor groups, labeling, for example, the Wolverton-Kaiser bill a danger to individual practice:

Other policymakers sought to strengthen the nonprofit Blues plans. Blue Cross underwrote hospital benefits and Blue Shield underwrote doctor services, including surgical plans and regular medical policies. Beginning in the late 1930s, the AMA's constituent state and local medical societies either established Blue Shield plans or, at minimum, began to supervise their operation. The American Hospital Association (AHA) negotiated with Blue Cross and the AMA worked with Blue Shield to establish basic guidelines for service-provider participation.

Because the nonprofits frequently offered uniform community rates for all subscribers and service benefits, most states passed enabling legislation that exempted them from taxes and insurance reserve requirements. Nonprofits promoted service benefits as a collective social good that supplied customers with coverage in the form of fully paid health services rather than dollar denominations. In contrast, commercial insurers sent indemnity payments directly to subscribers who individually negotiated their bill with the hospital or physician. Most physicians preferred indemnity payments because insurers stayed out of the doctor-patient financing relationship; however, indemnity payments usually failed to cover the medical provider's entire service fee.

The Blues' community orientation and their close relationship with providers appealed to government officials. During 1940s health care debates, moderate policymakers advanced compromise proposals to federally fund insurance through grants-in-aid to the states. Blues leaders recognized that they stood to profit from such legislation. State administrators would have been predisposed to purchase Blue Cross and Blue Shield coverage for program constituents because nonprofit plans claimed to uphold social goals and because service benefits allowed indigent patients to access medical care without paying out-of-pocket expenses. AHA representatives, hoping to reap financial benefits from swelling Blue Cross membership numbers, helped George Aiken (R-VT) and Lester Hill (D-AL) draft legislation to provide federal subsidies to states that purchased insurance for the poor.Footnote ³³

The Hill-Aiken approach became the cornerstone of Blue Cross pleas for federal funding throughout the 1950s. In 1952 testimony before Truman's Commission on the Health Needs of the Nation, nonprofit leaders asked policymakers to reconsider Hill-Aiken legislation and suggested using uniform Blue Cross cards so that “the indignity of a means test imposed at the time of requiring service would be avoided.”Footnote ³⁴ Throughout the decade, Blue Cross representatives lobbied the Eisenhower administration to subsidize policies for high-risk groups and the poor.Footnote ³⁵ In 1954, AHA and Blue Cross leaders wrote a model bill which, like Hill-Aiken legislation, proposed funneling federal grants to states to purchase insurance for the indigent.Footnote ³⁶

Flanders-Ives legislation, another variant of the grants-in-aid formula, reserved funding exclusively for nonprofit plans and stipulated that premium prices be adjusted to consumer income. The bill, originally formulated in 1949 by Representative Richard Nixon (R-CA) and Senator Jacob Javits (R-NY), was re-introduced in 1953 and again in 1955 by congressional Republicans who believed their measure superior to President Eisenhower's health recommendations.Footnote ³⁷

Both HIAA and AMA leaders opposed grants-in-aid legislation, largely on the basis that such reform would privilege nonprofit plans. Despite the AMA's close ties with Blue Shield, physicians feared that if one organization dominated health care financing then it would use its economic power to weaken doctor autonomy. Furthermore, AMA leaders were highly suspicious of Blue Shield's relationship with Blue Cross. Organized physicians had long fought hospital control; now they resented Blue Cross attempts to invite federal intervention into health care and worried that Blue Cross leaders were attempting to pull Blue Shield into their political orbit. Recognizing who held the most influence over their immediate success, Blue Shield leaders distanced themselves politically from their nonprofit sibling and instead supported AMA objectives.

The political atmosphere forced organized physicians and insurance industry leaders onto new ground; they had to advance their political line on the basis of achieving social objectives. The AMA and HIAA therefore allied to expand voluntary coverage and prove the private market's ability to outperform any scenario that federal legislation might yield. Indeed, they sought to extend the social contract through “private” mechanisms, driven by fear that the government would intervene if they failed to do so.

Physicians and insurers had to meet a gold-plated standard to demonstrate voluntary insurance's value because of the way policy debates merged with postwar prosperity and the cultural celebration of consumption. Consumers didn't just buy houses; they acquired a piece of the idyllic American life by purchasing a home in suburbia. Citizens didn't merely purchase food to satisfy daily caloric requirements; they walked the aisles of well-stocked supermarkets, choosing among hundreds of items wrapped in colorful boxes and shiny tin foil. Americans didn't want to simply call on the local family physician; they wanted to experience modern medicine through insurance policies that provided a wide range of procedures, including those offered by specialists connected to hospitals and university research centers. They wanted liberal access to “medical wonders,” from new surgical techniques to penicillin and radiation therapies. Footnote ³⁸ Blue Cross legitimized the consumer ideal by trumpeting the advantages of nonprofit plans that provided liberal service benefits. Furthermore, employers inadvertently encouraged workers to demand generous insurance coverage by subsidizing their fringe benefits in exchange for federal tax write-offs.

The political environment catered to consumer expectations through a range of legislative proposals. Health care reformers seeking a universal, government-managed system set the bar high. Private interests could match politically expressed social objectives only by demonstrating that the vast majority of Americans could readily buy, not just coverage for hospitalization or catastrophic costs, but comprehensive protection for most health care services.

AMA leaders altered their narrow conception of insurance in order to meet the political challenge. During the 1950s, a constant drumbeat developed around the premise that only by expanding insurance could doctors maintain their freedom from government dictates. Numerous articles in the Journal of the American Medical Association (JAMA) and most AMA meetings featured a medical leader warning that if physicians failed to champion and promote insurance, then the federal government would intervene in health care.Footnote ³⁹ Despite physicians' continuing reluctance to see insurance-company financing grow, political pressure compelled doctors to help fulfill a consumer ideal for comprehensive coverage:

Among insurers, there was a gradual “acceptance of the thesis that if private enterprise over a reasonable period of time does not meet public demands, the people turn to the government.”Footnote ⁴¹ The insurance trade press made a remarkable conversion—from executives labeling even limited forms of health insurance an “unnecessary evil” to industry leaders calling for all-inclusive policies:

Organized physicians routed the health care system along its modern-day path by choosing the insurance-company-financing model from among a variety of institutional patterns. Political attempts to adopt alternative market arrangements only encouraged institutional reproduction around insurance-company provision.Footnote ⁴³ By requiring private interests to fulfill a politically influenced consumer ideal for insurance policies that covered almost every conceivable medical care cost, federal reform proposals, including those that failed to pass and were later deemed inconsequential by scholars, bled through the private system. Understanding the interplay between politically enunciated social goals and the developing health care market will help us fully appreciate the boundaries that hemmed in and shaped the development of voluntary associations, in this case, the AMA and the HIAA.

Voluntary Associations: The AMA and HIAA

The institutional jostling for position between the crucial intermediaries that stood between public officials and citizens demanding more care had as much to do with shaping the health care system as the more visible legislative triumphs and defeats that punctuate the standard narrative. Although allied politically, the AMA and HIAA used different means to fulfill their objectives. The way each association fought political battles, structured their organization, and responded to market conditions privileged insurance-company authority over health care.Footnote ⁴⁴

Scholars tend to portray the AMA as an interest group that wielded unrivaled political power during the Eisenhower administration.Footnote ⁴⁵ Four AMA attributes have led scholars to emphasize organized medicine's strength. First, physicians derived considerable political and cultural authority from their professional position. Not only did doctors master complex skills, but they used those abilities to save lives—a task that brought them into intimate physical and emotional contact with patients and their families. In the late nineteenth and early twentieth centuries, AMA leaders leveraged professional prestige to win self-governing power from the state. Through state licensing laws, school accreditation activities, and the formulation of medical ethics, organized physicians gained regulatory authority over the medical market.Footnote ⁴⁶

Second, the AMA's influential role in occupational development generated impressive membership numbers. Physicians who lacked an AMA membership found it difficult to obtain hospital privileges or purchase malpractice insurance.Footnote ⁴⁷ The association's size led to its third advantage—money. Membership dues and proceeds from the Journal of the American Medical Association provided funds to maintain a large staff and pursue numerous goals. In contrast to reform groups, such as Michael Davis' Committee for the Nation's Health, AMA prosperity loomed large.Footnote ⁴⁸ Fourth, the AMA's federated structure furnished physicians with enormous organizational strength. This arrangement allowed physicians to fully exploit professional prestige through state and county medical societies that directly lobbied congressmen and also conducted campaigns to sway local political opinion.Footnote ⁴⁹

Spotlighting these attributes has led scholars to overlook AMA features that began to undermine association objectives. The AMA certainly wielded great political clout during the postwar era. However, the AMA's political strategies, organizational characteristics, and attitudes toward market development steadily undercut organized physicians' reputation during the 1950s and 1960s.

While launching numerous publicity-grabbing legislative battles, AMA leaders struggled to manage a massive bureaucracy and neglected to actively mold economic activities in a way that protected the professional standing of doctors. In contrast, HIAA leaders lobbied politicians away from the public eye and employed an efficiently organized association to direct member-firms on how to structure the market. These divergent approaches led organized physicians to lose political influence and professional autonomy whereas insurance companies gained political authority and expanded their economic function beyond underwriting risk to also managing health care delivery.

AMA Political Strategy

The AMA's successful crusade against Truman's health care plan has not only led scholars to overestimate organized medicine's power but also convinced contemporary AMA leaders to mistakenly believe that mass publicity would perpetually sustain political gains. The AMA hired the publicity firm of Whitaker and Baxter to oppose the Truman proposal with what was probably the largest legislative campaign ever waged. Following their victory, AMA leaders embraced political activity with a fervor, leading them to trumpet their stand on a myriad of issues, including vaccine distribution, each health care reform proposal, veterans' health benefits, the Bricker Amendment on international treaties, water pollution, federal funding for medical education, flood control, tax provisions, and federal government reorganization.

The AMA's excessive political exposure alienated citizens and policymakers and weakened the association's greatest asset—the perception of physicians as objective professionals. Although rhetoric about socialism turned most citizens against the Truman proposal, such a strategy was only effective against a comprehensive health insurance plan. As physicians continued to fight compromise measures designed to subsidize insurance for the poor or elderly, labels of “socialism” increasingly missed their mark and obscured the importance of building alliances with federal bureaucrats and policymakers.

F.J.L Blasingame helped convince the AMA's Board to follow a hard-line political stance during the 1950s and early 1960s. The conservative Texan shaped association policy as one of the most influential general managers in the history of organized medicine. Blasingame searched for D.C. representatives who would work unapologetically to prevent any federal encroachment in medicine. He wanted to avoid hiring an “appeaser or back slapper or an advocate of expediency” and instead looked for a lobbyist “who would much rather lose many times than back down on his principles once.”Footnote ⁵⁰

This unyielding political approach led the AMA's overconfident leadership to alienate some of its original supporters. As health care issues continued to foment and policymakers of all ideological stripes pushed for change, the secretary of Health, Education, and Welfare under President Eisenhower, Marion Folsom, regularly met and dined with AMA representatives. He expressed frustration about his inability to convince AMA officials to support minimal reform as a way to protect against more robust governmental interference in health care.Footnote ⁵¹ After the defeat of his reinsurance proposal, President Eisenhower bitterly blamed organized physicians, warning that the “American people are going to get medical care to which they are entitled, in some form or other … ”Footnote ⁵² Editorial writers who had opposed Truman's plan questioned why the AMA resisted more moderate proposals.Footnote ⁵³

Isolating themselves from previous allies left organized physicians vulnerable to criticism from the media: Consumer Reports stated that the AMA was inoculated with “the virus of total oppositionism … every important health measure to come before the current Congress has been fought by the AMA.”Footnote ⁵⁴ “Doctors and the American Medical Association,” countered AMA President David B. Allman, “frequently are berated for being ‘against’ everything and not ‘for’ anything. This is a hackneyed criticism that is tiresome as well as mistaken.”Footnote ⁵⁵

Press accounts that disparaged the AMA soon mingled with critical reports about individual physicians. Because health care reformers wished to demonstrate the inherent weakness of private medicine and because the press naturally sought sensational stories, physicians who behaved unethically attracted unfavorable publicity for the entire profession. Rapidly rising health care costs provoked charges of inflated fees, kickbacks, and unnecessary procedures.Footnote ⁵⁶ As we will see in a discussion of costs below, many of these charges were accurate. Dr. Paul Hawley, president of the American College of Surgeons, asserted in a US News & World Report article that unnecessary surgery, performed simply to collect fees, led physicians in some hospitals to remove healthy organs in sixty to seventy percent of the appendectomies that they performed.Footnote ⁵⁷

In 1955, the AMA hired Ben Gaffin & Associates to survey public attitudes toward physicians. The firm found that although most citizens trusted their own physician, eight out of ten respondents described him as “different” than other doctors, many of whom they believed acted out of pecuniary rather than humanitarian interests.Footnote ⁵⁸

As the public image of physicians deteriorated so did their political power. During the 1950s, the association lost one of its most important battles—to prevent the expansion of Social Security. Legislation to create a freestanding program of federal subsidies for states purchasing insurance for the poor failed; however, policymakers financed indigent care through Social Security amendments. In 1950, legislators passed an amendment that permitted local welfare officials to directly reimburse physicians and hospitals for supplying indigent care. This change allowed government administrators to set medical fees and restrict welfare programs to select doctors, thus circumventing AMA demands that medical societies negotiate remuneration rates and that patients be free to choose their doctor.Footnote ⁵⁹ Between 1956 and 1958, Congress altered formulas that determined state aid amounts with the net effect of significantly increasing federal funding of health care for the poor.

Moreover, the AMA waged a bitter campaign against the expansion of Social Security to cover the permanently disabled, largely because the program compelled doctors to accept government payments for patient examinations. As with other legislation, association officials charged that the program would create a strong position from which reformers could build a universal, compulsory system.Footnote ⁶⁰

The passage of the 1956 Social Security Disability Amendment sent a powerful signal that the AMA lacked the clout to defeat every piece of legislation that threatened professional power. Blocking assistance to some of America's neediest patients—the poor and disabled—further sullied the reputation of an organization supposedly devoted to serving the public.

AMA Organization

Partially related to the AMA's political difficulties was an associational structure that undermined member cohesion. Although officially based on democratic processes, under which county and state societies sent representatives to the state and national House of Delegates, an elite minority of the AMA wielded disproportionate control. Years of moving up the ranks through county, state, and national offices required an ability to impress already-established officials. Consequently, the AMA leadership seemed out-of-touch, aged, and inflexible. Most national House of Delegate members neared retirement with an average age of fifty-nine. Furthermore, national leaders tended to be wealthy urban specialists with the resources to donate time to association activities.Footnote ⁶¹

Although minority control tends to be the norm in large organizations, AMA leaders encountered four additional obstacles that weakened their ability to effectively manage the association.Footnote ⁶² First, the Board of Trustees and House of Delegates shared policymaking authority, which prevented one group from harnessing enough power to unify members around well-defined, long-term goals. Second, instead of attempting to strike a few significant targets, the leadership undertook a multitude of secondary and tertiary objectives which spanned the political, scientific, and economic arenas. Third, an enormous national bureaucracy hindered AMA efforts to accomplish stated goals. In order to handle the association's burgeoning workload, officials in the Chicago headquarters continually established new committees. By 1957, AMA leaders attempted to manage over sixty-four committees, twelve councils, and approximately 800 employees spread across twenty departments. These various committees and departments often worked at cross-purposes and wrangled over turf.Footnote ⁶³

Fourth, the AMA's decentralized, democratic structure bred organizational sluggishness and exacerbated disputes among ideological factions. When political matters unfolded rapidly, AMA leaders found themselves either speaking before official association policy was decided or telling policymakers that they would state their position once the House of Delegates convened its biannual meeting.

The AMA's numerous political battles created many occasions for physicians to employ the association's democratic structure to voice dissent. That national leaders encountered opposition from doctors who identified themselves as politically liberal is not surprising. Physicians who viewed the AMA as “a medieval, anti-social, highbrow, impotent, reactionary organization” were generally among the one-third of all doctors who lacked association membership.Footnote ⁶⁴ What proved truly detrimental to the association's capacity to implement strategies was the hostility that AMA political policies stirred up among ideologically moderate and conservative member-physicians. Many physicians who had opposed Truman's plan for universal care supported limited reform measures, such as legislation to provide the disabled with Social Security benefits.Footnote ⁶⁵ Recognizing that the AMA leadership wanted to roll back the tide and recapture a market that operated independently of any federal influence, politically moderate physicians argued that it was not “the proper function of the organization representing American medicine to make an effort to revise the whole economic system of this country.”Footnote ⁶⁶

At times it appeared that the leadership could not please anyone—when AMA leaders compromised with the Eisenhower administration over the creation of the Health, Education, and Welfare Department, conservative physicians argued that the agency would “prove to be the dragon that would devour us.”Footnote ⁶⁷ In another case, a faction of physicians condemned the Board of Trustees' decision to support federal grants for medical school construction. “This bricks-and-mortar subsidy is nothing in the world but a hauling down of our flag … once subsidies have been begun, the next step is to increase those subsidies until finally all freedom is gone,” charged one doctor from the floor of the House of Delegates.Footnote ⁶⁸

Disunity bred apathy. Throughout the postwar era, AMA leaders continually expressed concern about membership morale and participation at the state and local levels.Footnote ⁶⁹ Many physicians simply joined the association to qualify for malpractice insurance or to receive hospital admitting privileges.Footnote ⁷⁰ Without the looming threat of socialized medicine to spur physician cohesion, disgruntled and apathetic members found better uses for their time. The situation prompted a close observer of organized medicine to reflect that “[the] AMA needs to be resold to its own members.”Footnote ⁷¹

AMA membership numbers steadily decreased during the postwar era. As physicians increasingly specialized in a particular field of knowledge, they joined other medical organizations tailored specifically to their practice, whether surgery or neurology. The proliferation of associations impaired the AMA's position as the nation's principal medical society.Footnote ⁷²

Moreover, the AMA's grassroots power began declining right as national leaders were assigning a heavier workload to constituent societies. The AMA's enthusiasm for picking political fights as well as the rapidly developing health care market meant that local medical societies could no longer simply act as social clubs where physicians occasionally gathered to hear a scientific paper. Among other responsibilities, national AMA leaders instructed constituent societies to lobby policymakers around scores of political proposals, supervise Blue Shield plans, negotiate relations with commercial insurers, conduct local public relations campaigns, and monitor public welfare programs.

Physicians who disagreed with AMA political objectives or failed to see the benefits of membership lacked incentive to become involved with the local society's heavy workload. As doctors prepared to battle Medicare, organizational characteristics such as a divided minority leadership and abundant associational goals undermined the strength that organized physicians had previously drawn from their federated structure.

The AMA and Market Organization

For AMA officials, organizing the market around insurance represented a political rather than an economic project—voluntary insurance primarily served as a weapon against federal reform proposals. Thus, instead of crafting their own responses to the growing pressure for health care financing or seeking ways to efficiently distribute medical services, AMA leaders generally left the task of structuring the health care market to insurance companies.

For some AMA members, accepting insurance payments was a political compromise that they continued to resent. In 1949, the House of Delegates ousted the famous JAMA editor, Morris Fishbein, largely because of his continuing hostility toward insurance, particularly Blue Shield plans.Footnote ⁷³ After Fishbein's departure, many AMA members continued to complain that filling out insurance forms and detailing patient treatments privileged corporate power to the detriment of professional independence. As late as 1955, the Board of Trustees was reviewing House of Delegate resolutions declaring that prepaid plans with fee schedules were based on a “Soviet model.”Footnote ⁷⁴

Association leaders studied various insurance policies, publicized the growth of private health coverage, and encouraged rank-and-file doctors to accept insurance as part of the campaign against federal legislation. Beyond these superficial policies, however, the AMA failed to generate a clear market strategy, partially because of the association's organizational morass. In 1954, the AMA's Board of Directors created the Commission on Medical Care Plans to study various insurance programs and identify which ones could “protect the public and the proper interests of the medical profession.”Footnote ⁷⁵ The Board created this commission despite the fact that the Council on Medical Services, which reported to the House of Delegates, carried out a similar mandate.Footnote ⁷⁶ Also in 1954, the AMA terminated its Seal of Acceptance program for insurance plans, further demonstrating organized physicians' inability to actively shape health care financing. Footnote ⁷⁷ Three years later, a management consulting firm chided AMA leaders for failing to set insurance policy standards and thus losing an opportunity to influence market development.Footnote ⁷⁸

The AMA's refusal to endorse a preferred insurance-company model left members to squabble over the best way to finance health services. Some doctors argued that only nonprofit Blue Shield plans, which were under the supervision of medical societies, could safeguard physician professional standing.Footnote ⁷⁹ Other doctors protested that Blue Shield service benefits compelled them to accept fee schedule payments and created a direct insurer-doctor financing relationship that jeopardized provider sovereignty.Footnote ⁸⁰ These physicians preferred commercial insurance because the underwriters removed themselves from the doctor-patient relationship by paying indemnity fees directly to subscribers.Footnote ⁸¹

Behind the AMA facade of shrewd postwar political campaigns lay a messy, conflict-ridden process. Instead of unifying physicians behind positive, long-term political and economic strategies, the AMA reacted defensively, responding to legislation initiated by others and bemoaning the rapidly changing market rather than creating an environment that favored physician authority. Thus, the AMA failed to guide health care policy in a direction that preserved physician political influence and economic control.

The Birth of the Health Insurance Association of America

During the battle against Truman's reform plan, numerous trade associations represented health insurance interests. These groups included the Chamber of Commerce, various life insurance associations, the Bureau of Accident and Health Underwriters (Bureau), and the Health and Accident Underwriters Conference (Conference).

Soon after defeating Truman's plan, a rift developed between health insurance and life insurance executives because life underwriters expressed willingness to support Eisenhower's reinsurance legislation. Life insurers sympathized with the president's attempt to avoid socialized medicine and hoped that their compromise would convince Eisenhower to oppose expanding Social Security in ways that harmed their disability and life underwriting lines.Footnote ⁸² Edwin J. Faulkner, a Nebraskan and president of the Woodmen Accident and Life Insurance Company, led more conservative health insurers in opposing federal reinsurance. Most health insurers feared the regulatory burden that would accompany the program and the possibility of a gradual government takeover of private insurance. The political division plunged the industry into a state of “crisis” and demonstrated to health underwriters the danger of relying on life insurance associations for political protection.Footnote ⁸³

Insurers had established the Bureau and the Conference during the early twentieth century to study disability and accident insurance, which were far more limited forms of medical underwriting than hospital and medical coverage.Footnote ⁸⁴ The two associations had difficulty managing the explosive growth of health insurance and developed extemporaneously to handle its advancement. For example, the Bureau grew from nine committees in 1945 to an astounding 43 committees in 1955.Footnote ⁸⁵ However, the effectiveness of the Bureau and Conference was hampered by size, organizational overlap, and competition for member-company resources.Footnote ⁸⁶

Faulkner, who eventually became the Health Insurance Association of America's first president, cited the political situation to encourage Bureau and Conference leaders to explore creating a single organization. “Accident and sickness insurance has spoken from many mouths, to the confusion of both the public and the industry,” he argued. Faulkner warned that without the establishment of one health insurance group to negotiate federal politics, life insurance associations would “feel it incumbent upon them to undertake more aggressive programs in the field of accident and sickness insurance.”Footnote ⁸⁷

In 1954, representatives of the Bureau, Conference, several life insurance associations, and a casualty insurance organization began meeting as the Joint Committee on Health Insurance to discuss establishing a new trade association.Footnote ⁸⁸ The Bureau and Conference began to issue joint policy statements and hired a full-time lobbyist to live in DC.Footnote ⁸⁹ In 1956, the Bureau and Conference suspended operations and their member-companies established the Health Insurance Association of America (HIAA).

HIAA Political Strategy

Unable to harness the cultural prestige of physicians or claim the broad social goals of their nonprofit competitors, commercial insurers believed they held a particularly unfavorable public image. Because of negative cultural connotations associated with “big business,” HIAA leaders decided to fight reform proposals in a concealed manner.

Insurance executives were still licking their wounds from industry investigations of monopoly power undertaken by the Temporary National Economic Committee (TNEC) in the late 1930s. The hearings generated unfavorable publicity and led the industry into an intense judicial and political campaign to maintain state jurisdiction and fend off federal regulation of insurance.Footnote ⁹⁰

The industry's reputation was also tarnished by mail-order companies and fly-by-night operations that peddled marginal products with misleading advertisements. Some insurers marketed policies for ages “1 to 75” and offered large payments “for each sickness or accident,” even though they cancelled coverage as soon as the subscriber became ill. Sensational press accounts about meager benefits, deceptive ads, and policy loopholes led some observers to label health insurance a “racket.”Footnote ⁹¹

Against this backdrop, the industry fought a litany of federal reforms that threatened commercial companies by privileging their prepaid group and nonprofit competitors. The proposed legislation reinforced insurers' view that for-profit corporations, especially insurance companies, had precious little political capital to trade on in the public sphere. Insurers believed that voter suspicion of “big business” prevented open participation in political deliberations. Indeed, when a 1947 Gallup Poll asked respondents if corporations should be allowed to make political campaign contributions, an overwhelming seventy-two percent of interviewees answered “no.”Footnote ⁹²

HIAA officials therefore pursued a two-sided approach to defeat federal intervention in health care. On one hand, they publicly promoted the growth and success of private insurance; on the other hand, they pursued a hidden lobbying strategy to evade charges of corporate influence in federal policymaking. “We felt our only defense … was performance,” stated the HIAA's principle lobbyist. “Companies don't have very much political leverage,” he explained.Footnote ⁹³ To disseminate a positive image of the industry, the HIAA expended roughly a quarter of a million dollars annually to advertise the growth of private coverage. Ads in popular magazines showcased content families who could “rest comfortably” knowing that their savings were secure from the risk of illness.Footnote ⁹⁴ Through the Health Insurance Institute, which was funded by the HIAA, industry officials provided news outlets with positive statistics on health insurance and wrote editorials that countered critiques of voluntary coverage.Footnote ⁹⁵

While the HIAA widely publicized industry accomplishments, association representatives worked behind the scenes to convince federal officials to oppose threatening legislative proposals. The HIAA generally couched opposition to reform proposals in terms of allowing market competition to spread private insurance. Commercial insurers argued that federal funding to benefit a particular type of voluntary insurance, such as prepaid plans, would hinder the development and rapid spread of private insurance in all its forms. Unlike the AMA, however, the HIAA rarely, if ever, issued policy proclamations. Even when congressional committee hearings required public statements, HIAA officials avoided inflammatory language and focused their testimony on highlighting the swift spread of private insurance. Industry officials also established a cooperative relationship with federal administrators by providing them with health insurance statistics and expertise.

As part of their hidden political strategy, insurers chose Robert Neal to be the HIAA's chief lobbyist. An HIAA leader explained that the search committee had decided against choosing a well-known politician or famous individual because it would “imply that the business has some scandalous situations that … require an outside and impartial giant to handle.”Footnote ⁹⁶ The choice of Robert Neal, a conservative, relatively unknown industry insider, allowed insurers to fly under the media's radar.

HIAA leaders rarely lobbied congressmen from the D.C. office. When health insurance leaders wished to exert leverage over a particular measure, they contacted member-firms' executives, managers, and sales associates and encouraged them to meet with their congressmen during legislative recesses.Footnote ⁹⁷ Unlike the AMA, which attempted to shape local opinion by running ads in local newspapers and on the radio, insurers restricted the “vote back home” to constituent insurance-company employees.Footnote ⁹⁸ Neal explained why the HIAA generally shunned high-pressure D.C. lobbying and large-scale organizing:

Wilbur Cohen later commented that HIAA leaders survived many political battles without a “residue of anti-insurance company feeling” by declining to oppose legislation in an open, publicity-grabbing manner.Footnote ¹⁰⁰

At times, commercial insurers took cover behind the AMA's political shield. For example, Faulkner and other insurance executives who opposed Eisenhower's reinsurance legislation traveled to Chicago to convince the AMA's Board of Trustees to combat the measure.Footnote ¹⁰¹ AMA leaders took commercial insurers under their wing in return for their staunch alliance against government interference in health care. Organized physicians even opposed obscure legislation, such as a measure to bar insurers from terminating subscriber policies after three years of coverage. Parroting a major concern of commercial insurers, AMA leaders stated that “the regulation of insurance companies is a matter for the individual state governments.”Footnote ¹⁰² By using low-profile tactics and leveraging the AMA's profligate use of publicity, HIAA leaders exercised political influence without attracting public attention.

HIAA Organization

The HIAA's organizational arrangements bolstered industry leaders as they pursued their political and economic aims. Authoritative leadership and a lean bureaucratic structure lent the association the capacity and flexibility to navigate the challenges of health care financing.

The association's centralized leadership allowed it to apply robust direction to a vast industry. The HIAA represented companies that underwrote approximately eighty-five percent of commercial health insurance. Member-firms voted for the Board of Directors and officers from among the executives of constituent companies. HIAA founders created ten standing committees and left the Board to appoint ad-hoc committees to handle issues as they arose.Footnote ¹⁰³ The committees carried out in-depth research and made policy recommendations to the Board. Company representatives met once a year to vote on policy issues that were largely sorted out ahead of time by the committees and the Board. This structure allowed the most respected companies and industry executives to provide coherent, authoritative direction to member-firms. It also allowed a few leaders, such as Edwin J. Faulkner, to dictate conservative political policies for the entire industry.

The HIAA employed a streamlined organization. HIAA lawyers studied legislative proposals and regulations in Chicago, researchers and actuaries carried out studies in New York, and the D.C. office housed lobbyists. Nonetheless, staff members among these three offices probably numbered less than twenty-five.Footnote ¹⁰⁴

Like the AMA, HIAA leaders commanded large financial resources owing to corporate dues based on the amount of health insurance each company underwrote.Footnote ¹⁰⁵ However, HIAA members utilized resources more efficiently because they concentrated on only four goals—lobbying, self governance, expertise, and public relations.

The HIAA's structural features diverged sharply from those of the AMA. Strong leadership and efficient organization allowed insurance companies to successfully lobby politicians and pursue industry objectives. Whereas the AMA's bureaucracy weighed down physicians as they struggled to defend professional conceptions, the HIAA's organization served as a springboard, propelling industry leaders forward as they sought political and economic influence.

The HIAA and Market Organization

The HIAA anchored member-firms to the center of private health care by energetically expanding insurance-company financing. Between 1945 and 1965, the percentage of U.S. citizens with some form of insurance coverage grew from less than thirty percent to almost eighty percent, with commercial firms underwriting over half of all policies.Footnote ¹⁰⁶ This rapid organization of the health care financing market demonstrated the HIAA's exceptional strength.

Trade associations often remain weak because of interfirm competition and conflicting company interests.Footnote ¹⁰⁷ Indeed, the HIAA represented diverse health underwriters including casualty, stock, life, and mutual firms. However, because loss of business due to governmental action loomed as a larger threat than individual firm competition, HIAA leaders were able to establish robust industry governance. The HIAA derived enough authority from fear of federal regulation to encourage the rapid expansion of generous, financially risky insurance products and to persuade executives to share sensitive data with market rivals.

HIAA guidelines created a set institutional pattern for the industry by standardizing company administration, advertising, and insurance products.Footnote ¹⁰⁸ A Membership and Ethical Standards Committee examined company applications and investigated member-firms that violated the ethical code. To demonstrate their firm's reputation, applicants submitted state insurance department evaluations, actuarial data proving financial responsibility, and a history of any state licensing problems.Footnote ¹⁰⁹ Each member was obligated to maintain a catalog of consumer complaints and faced expulsion if state authorities reported “an abnormal record of complaints in relation to its volume of claims.”Footnote ¹¹⁰

HIAA leaders instructed affiliates to lobby their domiciliary states to adopt National Association of Insurance Commissioners (NAIC) model laws and follow such guidelines even if their state had weaker regulatory rules. The Uniform Individual Accident and Sickness Policy Provisions Law dictated contract lay-out, placement of exclusions, and clarity. Fair Trade Practices Acts prohibited false advertising.Footnote ¹¹¹ The HIAA's “Ethical Standards for Advertising” went even further than model laws by prohibiting the employment of unscrupulous sales agents, heavily marketing experimental policies without knowing whether the company could finance the product long-term, discrediting other insurance companies in ads, delaying claim payments, or making misleading claims that implied “that benefits are larger or broader than is actually the case, also the use of essentially valueless benefits, and of policies or coverages with unreasonable restrictions, limitations, exceptions, reductions, and exclusions.”Footnote ¹¹²

These guidelines primarily governed the market for individually purchased policies; the employee group market had fewer regulations because state officials assumed that company and union representatives had the requisite expertise to purchase insurance coverage. Scholars who assume that the nonprofit Blues covered individual enrollees whereas commercial insurers “cherry-picked” healthy employee groups out of the larger risk pool, have missed for-profits' actual behavior. For-profit companies were far more successful than historians have acknowledged: commercial firms sold approximately one-third of their policies to individual purchasers despite the financial risks and increased possibility of adverse selection inherent in such coverage.Footnote ¹¹³ HIAA leaders motivated companies to sell individual policies by continually warning that failure to spread coverage to all population groups would invite government intrusion into the insurance business.Footnote ¹¹⁴

During the 1940s and early 1950s, insurers could demonstrate significant insurance growth by covering employee groups and healthy young individual-subscribers. As the decade progressed, however, insurers had to liberalize group benefits and cover ever more hazardous risks in the individual-subscriber market in order to continue expanding coverage.

Insurers began underwriting more generous group benefits for several reasons: to keep federal power at bay, to compete with nonprofits, and to satisfy union demands. Once they received hospitalization policies, employees then sought surgical and regular medical coverage. Regular medical policies, which covered more frequently accessed physician services, moved insurers into riskier territory, away from products that attempted to mitigate moral hazard by only covering hospital bills in case of an accident or serious, unforeseen illness. Between 1950 and 1960, the number of subscribers with regular medical coverage grew from eight million to over forty million.Footnote ¹¹⁵ Ironically, the major medical policies that underwriters had created to restrict health insurance were co-opted by consumers to produce comprehensive coverage. Employers, acquiescing to union bargaining requests, began layering policies for catastrophic costs over top of basic or first-dollar coverage.Footnote ¹¹⁶

In the individual-purchase market, insurers sought to cover ever more financially hazardous subscribers. As the Medicare debates heated up with the 1957 Forand bill, HIAA leaders released the Blueprint of a Program of Research, Education, and Information. To comply with the Blueprint, HIAA officials established committees to study policies for high-risk groups including the elderly.Footnote ¹¹⁷ At their 1958 annual meeting, delegates adopted guidelines for policy extension including the following:

In this way, HIAA leaders sought to make health insurance a product for the masses.

In an effort to carry out this project, HIAA lawyers wrote state enabling laws that allowed companies to pool funds and collectively operate insurance plans for the elderly. Commercial firms in various regions created cooperative programs, such as Connecticut 65 and Western 65, to market and sell policies to the aged. Additionally, insurers increasingly allowed individuals with employee benefits to retain their policies upon retirement. Some firms allowed subscribers to include elderly parents as “dependents” when they purchased family coverage. Between 1958 and 1961, the number of aged citizens with some form of health insurance more than doubled, from 2.3 million to 4.75 million.Footnote ¹¹⁹

Actuarial forecasts warned insurers against such drastic expansions in coverage, even though health underwriting expertise remained superficial. Life insurance required actuaries to assess the probability of incurring one claim at a predetermined amount, whereas health insurance involved many conditions, various payments, and numerous claims per subscriber. Moreover, insurers lacked illness-specific morbidity statistics. Thus, underwriters initially guessed the amount of reserves that were necessary to support policy offerings.Footnote ¹²⁰ Actual experience with health policies only confirmed actuaries' fears about the frequency of claims and high costs associated with generous medical benefits.

Health insurers hoped that by intensely developing underwriting expertise, they could find ways to overcome bleak actuarial forecasts and continue expanding benefits.Footnote ¹²¹ HIAA leaders encouraged insurers not only to pool generic data related to policy sales and losses but also to share sensitive competitive information.Footnote ¹²² In HIAA forums, executives revealed what steps their companies took to introduce new insurance products and the various problems they encountered. “Your progress in the past has been hampered due to little tendency to cooperate and pool experience and knowledge for improvement,” stated one HIAA official. He continued: “Thanks in large part to this fine organization we have largely put aside such provincial attitudes.”Footnote ¹²³

Whereas physicians remained divided and confused by the rapidly changing market, HIAA members united to undertake the difficult task of organizing the health services sector. Industry leaders envisioned a health care market built around insurance-company-financed policies; they employed both institutional wherewithal and the threat of alternative political scenarios to realize that model. HIAA leaders certainly encountered resistance to extending coverage to high-risk subscribers; however, statistical data attest to the remarkable amount of cooperation they attained despite asking generally conservative industry executives to risk financial loss.

Rising Costs

The extraordinary growth of insurance-company coverage drove insurers up against the insurmountable wall of moral hazard. Contrary to some scholarly accounts, steep escalations in health care costs began well before the passage of Medicare.Footnote ¹²⁴ During the 1940s, as insurance-company health policies started to spread, medical cost increases began outstripping all other categories of goods in the Consumer Price Index.Footnote ¹²⁵ In a period of overall economic growth, insurers could, to a degree, pass along higher prices to employers and consumers. However, skyrocketing medical prices made it increasingly difficult to cover individual subscribers who, in the absence of employer subsidies, often could not afford the insurance premium. In the end, cost problems hampered insurers' ability to continue expanding and liberalizing coverage.

In a futile effort to rein in rising prices, commercial companies experimented with deductibles and coinsurance in order to discourage patients from over-utilizing benefits.Footnote ¹²⁶ Additionally, HIAA leaders deployed “education committees” to voluntary association meetings and workplaces to teach subscribers that demanding unnecessary medical treatment drove up health care prices.

Commercial insurers' primary concern, however, rested with physicians—doctors had the authority and expertise to properly control the amount of services that subscribers received. Yet physicians worked in a system that financially rewarded them for overutilization. Doctors received payments for each service or procedure they performed; medically unnecessary, superfluous services allowed physicians to both earn more and assure patients that they had done everything possible to treat them.Footnote ¹²⁷ For example, doctors could demonstrate that they delivered superior care by admitting a patient to the hospital for unessential tests. One study showed that as much as thirty-six percent of hospital admissions under nonprofit insurance involved incorrect utilization.Footnote ¹²⁸

Insurers also gathered abundant evidence of physician bill-padding.Footnote ¹²⁹ Physicians' traditional use of the sliding-scale, which permitted them to set fees according to the patient's ability to pay, created a ready vehicle for bill-padding. According to press accounts and patient complaints, doctors increased their charges when they knew that a patient had insurance.Footnote ¹³⁰ Some physicians admitted to charging higher prices for filling out insurance paperwork.Footnote ¹³¹ The existence of a subjective pricing system created financial chaos because neither underwriters nor physicians could discern the “fair” market value of services.Footnote ¹³²

Industry leaders treaded lightly around the issue of provider controls because they feared picking a fight with organized physicians. Thus, initial cost containment endeavors were feeble: industry representatives attempted to educate doctors about insurance principles. A 1955 industry-wide report asserted that “the most effective control is a proper understanding … by providers of medical service of health insurance, its possibilities, its limitations and its most effective use.”Footnote ¹³³ Through physician newsletters, institutional advertisements, display exhibits, and speaker programs, industry leaders pleaded with physicians not to over-utilize procedures or increase service bills.Footnote ¹³⁴ After viewing insurance industry data on billing abuses, AMA leaders joined the education campaign.Footnote ¹³⁵ “Let's Use Not Abuse” articles began appearing regularly in the JAMA and AMA News.Footnote ¹³⁶

Physicians' meetings often featured an AMA or insurance industry representative warning that overutilization and bill-padding undermined long-term professional interests by causing premium prices to rise, making it difficult for consumers to afford policies, and, ultimately, inviting federal reform.Footnote ¹³⁷ AMA leaders understood that out-of-control costs would inevitably lead to regulation from above, whether from insurers or federal officials:

AMA and HIAA education campaigns ultimately failed to contain costs. Politely requesting that physicians monitor the bottom-line could not turn back the immutable principle of moral hazard. Insurers and physicians, therefore, turned to ground-level organizations to manage their financing relationship and restrain costs.

Ground-level Organizations and Controlling Costs

Rapidly mounting costs pressed HIAA member-firms to become more involved in health care delivery. The spread of insurance-company policies therefore led to an organizational revolution in the health care market: hospitals, AMA medical societies, physicians, and individual insurance companies transformed their operations to create interlocking institutions that connected doctors and insurers. Under this corporate model, insurers struggled to impose supervision on physicians whose pecuniary interests diverged from theirs.Footnote ¹³⁹

In order to inspect physician work, insurers began to harness groups that the service providers, in the face of negative publicity, had created to police themselves. These groups were forerunners of modern-day utilization review committees. In 1949, a New Jersey hospital administrator reacted to reports of unnecessary surgery and other unethical behavior in his facility by establishing a tissue committee.Footnote ¹⁴⁰ The committee name came from the necessity of testing tissue after surgery to determine whether or not the removed organ contained a pathology. The idea spread quickly and most hospitals established physician committees to review surgeries. In one hospital, for example, the establishment of review procedures decreased the percentage of healthy appendix removals from twenty-eight percent to an acceptable rate of eight to nine percent.Footnote ¹⁴¹

In 1955, insurance leaders further increased oversight of health care delivery by encouraging hospitals to institute committees to identify any doctor whose charges or procedures deviated from the “general pattern of practice.”Footnote ¹⁴² Insurance company representatives increasingly visited hospitals to review patient records and worked with administrators to create uniform accounting procedures that permitted underwriters to more readily monitor medical billing. At a higher level, insurers participated in regional planning councils that approved medical facility construction; they hoped that limiting hospital capacity would give medical providers less incentive to over-utilize services.Footnote ¹⁴³

Insurance companies began accessing grievance committees, which were composed of medical society physicians, to object to “gross instances of overcharge or overutilization.” In 1949, AMA leaders directed state and local medical societies to establish grievance committees to review patient complaints about physician bills or treatment quality. HIAA officials issued a 1957 memorandum to member-firms encouraging them to use grievance committees as a way to promote local insurer-medical society relations.Footnote ¹⁴⁴ However, company representatives complained that grievance committees were of limited use because “the principal problems resulting from inadequacy of control were over-utilization and a frequency of minor overcharges, rather than major overcharges.”Footnote ¹⁴⁵ Insurance company utilization reports and the potential for bad publicity from charges of unnecessary medical procedures convinced AMA constituent societies to implement more frequent, standardized reviews of physicians' fees and medical treatments. By 1965, over 35 state and metropolitan medical societies had review committees that regularly evaluated physician charges and procedures for unusual practices.Footnote ¹⁴⁶

Additionally, individual physicians tailored their practices around the growth of third-party insurance. Doctors increasingly abandoned house calls in favor of offices where administrators could organize patient records and manage the paperwork required by insurance-company claims. AMA leaders instructed physicians on how to handle relations with insurance company medical directors and representatives who called or visited doctors to question them about particular cases.Footnote ¹⁴⁷

One way physicians attempted to protect their professional sovereignty was by avoiding direct funding relationships with for-profit companies, thus requiring insurers to send indemnity payments to patients who individually negotiated their bill with the doctor. During the 1940s and 1950s, medical societies established committees to negotiate fee schedules with commercial insurers. These fee schedules did not set doctors' charges; they simply existed to guide insurers when they reimbursed subscribers.

Although indemnity payments partially protected insurance companies from rising costs by requiring patients to make up any difference between scheduled payments and the doctor's bill, they left the industry vulnerable to consumer and reformer criticism about inadequate benefits. Even when insurance companies attempted to match indemnity schedules to prevailing physician charges, price increases quickly rendered them obsolete. In one study, indemnity payments considered sufficient for “paid-in-full” benefits only amounted to sixty-three percent of average service charges four years later.Footnote ¹⁴⁸

Commercial insurers attempted to convince physicians to establish a measure of fee consistency by adopting a Relative Value Schedule (RVS) that assigned unit values to each service and procedure. Doctors would have still retained the freedom to charge what they wished for each unit. Some state and county medical societies adopted a RVS. Some doctors, however, condemned the RVS as a devious way for insurers to regulate physician fees.Footnote ¹⁴⁹ The national AMA spent years developing a RVS; but in 1958, the House of Delegates voted to take no action on the report.Footnote ¹⁵⁰

In a bid to ease physician fears about regulated fees, compete with Blue Shield, cover the entire medical bill for subscribers, and beat back reformer critiques, many commercial insurers began allowing doctors to bill “usual and customary and reasonable” charges. Although scholars have cited “usual and customary” fees as evidence of organized physicians' economic power, it actually signaled doctors' increasing dependence on third-party funding.Footnote ¹⁵¹ In order to manage such reimbursements, insurance companies began generating individual physician fee profiles.Footnote ¹⁵² Additionally, because “usual and customary” remuneration allowed doctors flexibility in setting their fees, for-profit insurers began convincing doctors to establish direct funding relationships with them.

AMA leaders had long warned that direct insurer-physician financial ties would eventually, inevitably lead to lay supervision of medical care delivery, but some physicians preferred compensation directly from insurance companies because it reduced the need for collection services and guaranteed payment for insured procedures.Footnote ¹⁵³ By the early 1960s, approximately one-third of commercial claims were paid directly to physicians on assignment.Footnote ¹⁵⁴ Additionally, doctors received almost all Blue Shield benefits on assignment. These direct financing linkages severed monetary relationships between doctors and patients, became crucial to the development of cost containment measures, and enhanced insurance company authority over health care delivery.

To accommodate the growth of health care coverage, insurance companies also changed their operations. Whereas some firms integrated their medical insurance and life insurance operations, some companies created new actuarial, claims, marketing, and policy-writing departments to exclusively handle health care products. A number of large companies, like Prudential, decentralized their operations so that regional offices could handle the rapidly rising claims volume and position company representatives closer to physician offices and medical societies.Footnote ¹⁵⁵

As discussed, HIAA member-companies gathered health care data to generate more accurate actuarial forecasts; this information was crucial to the project of controlling physician utilization. Claims management data, statistics from utilization review committees, and physician fee profiles associated with “usual and customary” payments, aided companies as they developed the expertise to manage health care delivery. The task proved complex as underwriters had to assemble information to learn about the symptoms and treatments associated with over one thousand health conditions.Footnote ¹⁵⁶

Insurance leaders and AMA officials worked together to create standard claims forms that all HIAA members agreed to use in order to streamline physician paperwork. The claims form used AMA nomenclature to extract information from physicians about how and why they treated their patients. Underwriters used a coding system to enter claims data into IBM punch card machines.Footnote ¹⁵⁷ Insurers not only used the computerized data analysis to tabulate premium calculations but also to identify patterns in medical care delivery.

Underwriters also studied data from tissue and utilization review committees to “evaluate the effectiveness of the use of hospital facilities and service in treatment of certain conditions.”Footnote ¹⁵⁸ Insurance companies developed guides that listed disease categories, injuries, and surgeries along with usual hospital stays, services, and discharge factors. Armed with these data, insurers began requiring doctors to obtain permission before a patient could be admitted to the hospital. Admission certificates showed the amount of days that the insurance policy would be in effect based on the diagnosis.Footnote ¹⁵⁹

By developing institutions to manage health care delivery, insurance companies compelled doctors to rely on them, not merely to underwrite risk and finance services but also to manage and coordinate health care delivery. This corporate model ensconced insurers in a tentative supervisory role over doctors. Insurers further strengthened their oversight of physicians after the passage of Medicare and during the managed care era of the 1980s and 1990s. However, they laid the institutional groundwork for such developments during the 1950s.

Medicare

Detailing Medicare political debates falls outside of this article's purview.Footnote ¹⁶⁰ What is important for demonstrating the interplay between politics and market structure is how policymakers designed the 1965 program around what consumers and voters viewed as a legitimate health care model. The insurance-company-managed system, although previously contested, was now institutionally entrenched and thus provided a natural foundation upon which politicians could construct the Medicare program.

After the defeat of Truman's plan, liberal reformers retreated to a strategy of incrementalism that not only abandoned the goal of universal care in favor of coverage for defined groups, but also increasingly conceived of such protection in terms of third-party insurance.Footnote ¹⁶¹ The political strategy meshed well with voter sentiments. Between the 1940s and 1960s, polling on voter preferences for reform returned varying results based on the way the question was asked and program details given; nonetheless, a stable majority favored federal funding for health care.Footnote ¹⁶² Social Security Administration officials, union leaders, and reform-oriented politicians astutely cast the elderly as a “deserving” group who required federal assistance to obtain medical coverage because their declining health and low employment rates left them particularly vulnerable to the high costs of insurance.Footnote ¹⁶³ By couching reform legislation in familiar organizational terms, policymakers presented voters with a recognizable, legitimate cultural image. All major reform proposals adopted the insurance-company model and existing private market structures. Robert Ball, the Commissioner of Social Security, later remarked that “[t]here was overwhelming political agreement that Medicare did not have a mission to reform delivery of, or payment for, medical care.”Footnote ¹⁶⁴

Organized physicians nevertheless launched an all-out political and media assault, returning to the well of tactics that had proved successful in defeating Truman's health care plan. The AMA established a Political Action Committee, initiated a national advertising campaign against Medicare, and leveraged its federated structure to lobby politicians and voters through local medical societies.

The publicity-grabbing strategy was poorly suited to the new political and economic context, within which Medicare seemed the logical next step. The AMA merely made itself, as Theodore Marmor observed, a “conspicuous target,” allowing political opponents (which included Republicans) to accuse the association of using “scare tactics” to frighten the elderly.Footnote ¹⁶⁵ Moreover, AMA leaders had difficulty keeping members unified against Medicare. As with the Social Security disability program, many physicians favored federal benefits for the elderly; some had difficulty understanding why association leaders would make apocalyptic claims about benefits delivered through the familiar channel of insurance-company administration.Footnote ¹⁶⁶

AMA representatives warned insurance industry leaders that accepting any compromise that permitted Medicare to pass would “undermine and eventually would destroy our system of voluntary health insurance.”Footnote ¹⁶⁷ Although the HIAA remained politically loyal to the AMA during the Medicare debates, the insurance industry neglected to stridently oppose the legislation. Conservative HIAA leaders warned industry executives that Medicare would be used as “an entering wedge” for a federal takeover of the entire health insurance sector. However, company executives had learned that coverage for the elderly was unprofitable; many of them believed it was a mistake to squander political capital opposing a program that allowed them to offload their most financially hazardous risks.Footnote ¹⁶⁸ Moreover, Social Security officials continually asserted that Medicare would financially benefit insurers not only by removing the elderly from private risk pools but also by allowing underwriters to sell benefits that supplemented government coverage.Footnote ¹⁶⁹

Although Blue Cross actively negotiated with federal administrators to mold the program in ways favorable for nonprofit plans, HIAA leaders and Blue Shield representatives demonstrated their political allegiance to organized physicians by refusing to bargain with government officials over legislative details. During the spring of 1965, once Medicare's passage appeared inevitable, industry representatives argued that commercial insurers, like Blue Cross and Blue Shield, should be permitted a role in administering the program.Footnote ¹⁷⁰ Operating on the premise that an “efficient administrative arrangement would take account of, and build upon, the activities already being carried on and the experience already acquired by … various private organizations,” federal policymakers included commercial insurers as candidates eligible to participate in Medicare's intermediary program.Footnote ¹⁷¹

The passage of Medicare benefitted both commercial and nonprofit insurers. Insurance companies assumed lucrative intermediary positions between medical providers and the government, which allowed them to secure administration fees without undertaking any underwriting risk.Footnote ¹⁷² Most significantly, Medicare adopted the ground-level institutional arrangements that insurers had already constructed to manage health care delivery. In their position as intermediaries, insurance companies used “usual and customary” reimbursements, generated physician fee profiles, required hospital admission certifications, negotiated with medical societies, and gathered data from utilization review committees.Footnote ¹⁷³ This development legitimized insurance companies' role expansion beyond the financing of services to the management and coordination of both the public and private health care sectors.

Furthermore, insurance companies bolstered their political and economic standing because their objectives now aligned with those of the federal government. Subsequently, both insurers and Medicare administrators searched for ways to diminish physician and hospital autonomy in an ineffectual attempt to restrain mounting costs.Footnote ¹⁷⁴