Senator Dianne Feinstein, November, 2009: "I basically believe the medical insurance industry should be nonprofit, not profit-making." [As she recounts the 100-year history of the American medical insurance system]

As originally posted in the reader-diary section of; the post’s 2009 comment thread is available at that link.

Thank you, Senator Feinstein, for during your homework, and for sharing the results, and your humane and compassionate conclusions, with us from the Senate floor Monday (11/2/09):

Mrs. FEINSTEIN. Mr. President, since most people have some form of health insurance, I decided, after many calls from constituents who have said to me: I can’t afford a 20-percent increase in my medical health insurance premium; I had a 10-percent one last year, I began to look into the history of the medical insurance industry in America. I have come to the floor to discuss the current state of the private, publicly-[traded], for-profit health insurance industry and the ways this system must be changed during health care reform. Bottom line: Our country is the biggest health care spender in the world. In return, we get very average results.

It wasn’t always this way in America. I wish, for a moment, to briefly review the history of health insurance in our country. Because understanding its development and its transition to the for-profit, commercial health insurance model is actually critical to this debate.

The story began to take shape about 90 years ago. There were very few health insurance plans before the 1920s. As a matter of fact, there was not much in the way of medical services to insure. Options for medical care were primitive by today’s standards. In 1900, the average American spent $5 each year on health care-related expenses. This amounts to roughly $100 in today’s dollars. Health insurance was not necessary because the cost of care was low. Over 90 percent of medical expenses were paid out of pocket. Most patients were treated in their homes, and medical technology and treatment options were very limited. The earliest private health insurance plans in the United States were fairly basic agreements, primarily sponsored through employers or unions. Employers deducted funds from participating workers’ salaries and contracted with local physicians for treatment.

During the 1920s, medical technology was advancing and the treatment of acute illnesses shifted from homes to hospitals. But on the heels of the Great Depression, an increasing number of Americans were unable to afford medical services, which were becoming more costly. In 1929, the Baylor University Hospital developed a plan to guarantee affordable treatment options for patients while ensuring a steady stream of revenue for the hospital. According to author Paul Starr, the Baylor plan provided up to 21 days of hospital care and certain services to 1,500 local teachers in Dallas, TX, for $6 a year or 50 cents a month, if we can believe it.


The Baylor plan proved popular and was soon expanded. It served as the foundation for what would become Blue Cross, the first example of a major, nonprofit medical insurance provider. Throughout the 1930s, the number of Blue Cross plans grew and enrollments expanded. By 1937, 1 million subscribers were covered.

In response to the lack of coverage by Blue Cross for physician services, in 1939, the precursor to Blue Shield, called the California Physicians Service, was developed. This plan reimbursed physicians for the cost of services based on negotiated payment schedules. According to the Congressional Research Service, in 1945, nonprofit Blue Cross and Blue Shield plans had expanded to cover 19 million subscribers nationally in most States. These nonprofit Blue Cross and Blue Shield plans dominated the health insurance industry. At this same moment, Congress was reviewing the matter of insurance regulation, generally. In 1945, after significant lobbying by the industry, the McCarran-Ferguson Act was enacted. By passing this law, the Federal Government committed to a hands-off approach to insurance regulation, generally, including the regulation of for-profit, commercial health insurance companies.

This is where things began to change. The McCarran-Ferguson Act gave States, not the Federal Government, primary responsibility for overseeing the insurance business. It meant, as a practical matter, that whether insurance companies would be regulated forcefully or with little care would be left up to individual insurance commissioners in each of the 50 States. Additionally, the McCarran-Ferguson Act included a specific antitrust exemption for the business of medical insurance. As a result, practices such as price fixing, bid rigging, and market allocation, prohibited by Federal law in every other industry, were left up to the States and their enforcement mechanisms.

If insurance companies colluded to raise prices above competitive levels, Federal officials would not and could not investigate or intervene. All regulation was up to the States and, in fact, very little regulation has taken place.

During World War II, for-profit, employer-based health insurance plans expanded rapidly and took a firm hold in our country. Due to price and wage controls, employers competed for workers by offering health insurance benefits. In 1944, the unemployment rate was 2 percent. Additionally, unions were able to collectively bargain health insurance benefits and employer contributions for health insurance which were excluded from a worker’s taxable income. By the 1950s, for-profit commercial health insurers, such as Aetna and the Connecticut General Life Insurance Company, known now as CIGNA, became very active. Then things started to change. The market share of Blue Cross and Blue Shield was significantly reduced in many parts of the country. As of 1953, commercial insurers provided hospital insurance to 29 percent of Americans versus Blue Cross’s 27 percent.

The widespread entry of commercial insurance into the health insurance market had a dramatic impact. First, the commercial health insurers did not operate under the same rate restrictions as Blue Cross. Second, Blue Cross premium rates were based on the average cost of medical services in a defined geographic area or community. Commercial insurers, on the other hand, calculated premiums based upon the claims of particular groups or individuals and adjusted these premiums each year depending on their health status. This also allowed commercial insurers to evaluate coverage on an individual rather than use the community rating system of Blue Cross. Therefore, commercial insurers were able to underbid Blue Cross for firms with very healthy workers who were cheaper to insure.

Right then and there, we begin to see the skewing of the system away from a community rate toward an individual assessment; whereby companies could cherry-pick only the healthiest and, therefore, make more money.

The loss of these healthier groups then raised average costs among the remaining employees, placing Blue Cross at a competitive disadvantage with commercial insurers. This competition from commercial insurers eventually resulted in Blue Cross changing the way its premiums were calculated. The single, community-wide premium pricing model was replaced in favor of the commercial approach. This shift toward charging premiums based on claims of particular groups or individuals changed the nature of competition in the health insurance market. Insurers could reduce costs by shifting risk and recruiting employers with healthier workers, and they did. Furthermore, because they could choose whom to insure, many large, for-profit commercial insurers left the individual market altogether in favor of large-scale employers because they carried lower operating costs.

Where does that leave us today? Today we have a health insurance industry where the first and foremost goal is to maximize profits for shareholders and CEOs, not to cover patients who have fallen ill or to compensate doctors and hospitals for their services. It is an industry that is increasingly concentrated and where Americans are paying more to receive less.

Here is the bottom line: According to the Kaiser Family Foundation, in the last 9 years, American families have seen their health insurance premiums more than double, while benefits have been getting worse and the industry has been growing less competitive.


The American Medical Association described it this way:

The United States is headed toward a system dominated by a few publicly traded companies that operate in the interest of shareholders and not primarily in the interest of patients.

I think that is a very sobering statement.

The effects of this market concentration are being felt by consumers and families. They are being felt by American businesses. They are being felt by doctors and health care providers.


According to Health Care for America Now, between 2000 and 2007, profits at the 10 largest publicly traded health insurance companies soared up 428 percent, from $2.4 billion in 2000 to $12.9 billion in 2007.


This history, and this failed market, is a uniquely American story. I recently read "The Healing of America" by T.R. Reid. He is a former Washington Post journalist who has a bum shoulder. So he decided he would go from country to country and go to doctors in that country, examine their health care sector, see what would help him, what they recommended, and it is a very interesting book. He writes about the health care systems of the countries he visits.

A few things are clear. First, as Reid says:

The United States is the only developed country that relies on profit-making health insurance companies to pay for essential and elective care.

So in every country that has health care reform–the United Kingdom, France, Switzerland, Germany, Canada–the United States is the only one that allows this open, ribald, for-profit health insurance industry that we do in this country.

Profit-seeking motives do influence insurance companies. Today, insurance companies have a financial reason to deny coverage to people who may actually get sick, so they exclude people with even the most minor preexisting conditions.

Secondly, if you get sick, insurance companies will comb through past records to find a reason to retroactively deny coverage. This means people lose their health coverage when they need it the most.

In other nations, with not-for-profit insurance, there is no motivation for companies to engage in these practices. Everyone is covered regardless of his or her health history. This allows risk to be effectively spread across the entire population.

Other countries accomplish this with employer responsibility and an individual requirement to become part of the insurance system.


Americans like to criticize other nations’ systems as bureaucratic. But in truth, it is our system that is wasteful and inefficient. Many other countries are able to deliver better health care for lower prices than we do currently. I wish to point this out.

As T.R. Reid points out, our system, with for-profit insurance and medical underwriting, has some of the highest administrative costs in the world because, in the United States, roughly 20 percent of every premium dollar is spent on administration. This includes advertising, profits, and paperwork–20 percent goes to this.


As we have seen, other industrialized nations spend less on administrative costs. They have nonprofit insurance. They use employers and individual responsibility to provide basic health care to everyone. This structure does, by independent analysis, provide better results because, whatever the indicator, the United States lags behind the rest of the industrialized world.

This is painful, but I believe we have to look at it. According to the World Health Organization, France leads the world in overall system performance, followed by Italy. America is 37th. These are the top health care systems: France, Italy–and, as you can see, the rest. We are No. 37.

In avoidable mortality, which measures a system’s effectiveness in caring for people who contract a potentially serious medical condition, again, France tops the list, again, followed by Japan. The United States is 15th.

The United States lags other developed nations in infant mortality. Here it is, as shown on this chart. This is according to the Commonwealth Fund. The leader is Japan, with 3 deaths per 1,000 births. We are No. 22 on that list.

This is surprising because you would think, particularly with infant mortality, we would be a real leader, but we are not.

To summarize, I think action is needed.

Other countries are far from perfect, and I am not saying anything other than that. But these lessons show that high-quality health care can be delivered for less than we currently spend. Our system of relying on for-profit medical insurance, I believe, is broken. We are spending more for worse results than the rest of the world.

That is what I hope to show.

That is why it is essential that we take action, and take action now. I basically believe the medical insurance industry should be nonprofit, not profit-making. There is no way a health reform plan will work when it is implemented by an industry that seeks to return money to shareholders instead of using that money to provide health care. This is difficult to accomplish today, but there are a number of steps that can be taken in this direction.

The first is to repeal the antitrust exemption.


I also believe a public option is an essential piece of any effort. It will provide robust, nonprofit competition for an industry that is broken and profit-ridden. In concentrated markets, the public option will provide consumers with real choice. Remember, the largest market in America is the Los Angeles market, and a majority of that market is controlled by two health insurance companies.

Because it will not attempt to make a profit, the public option will not turn anyone away. It may be able to charge lower premiums because its goal will be to provide health care coverage, not to return profits to shareholders. Whether it is opt-in or opt-out, States that strongly object to providing nonprofit competition to residents should have the opportunity not to participate. But make no mistake; the public option alone will not solve our Nation’s problem with health care. It will be available to a relatively few Americans at first. Only those who will purchase insurance in newly created exchanges will have the opportunity to buy it. But I believe it is a building block as we work to construct a new system.

In addition to creating a public option, we must put health insurance companies on a path toward more responsible behavior. That is why I am proposing a Federal medical insurance rate authority.

My proposal for a medical insurance rate authority builds on the successful and well-accepted model of utility commissions. Throughout this country, providers of gas, water, and electricity need to justify any proposed rate increase. This is required because the services they provide–water, gas, and power–are considered necessities for life.

Well, are they more a necessity for life than health insurance? I don’t think so. Health insurance should be no different. Access to affordable medical care is certainly a necessity of life.


We need to remember what health insurance originally was in this country, nonprofit; and what it is around the world, nonprofit; and a way to ensure that people can get basic care to stay healthy and they are protected from financial ruin when they get sick. I believe strongly this must be the underlying goal of any health reform the Senate approves this year.

I’d only add, Senator Feinstein, that you are in a uniquely powerful and privileged position to actually effect those beliefs of yours, on our behalf. One of a mere 100 United States Senators, representing 300 million fellow citizens. You have much, much more than a bully pulpit at your disposal, unlike the rest of us. Please follow through, in every way possible, on these admirable words, and on your principled challenge to the health care status quo. A principled challenge that you’ve courageously made in public despite the exceedingly-powerful vested interests who doubtless believe and behave by now as though they deserve to "own" our Congress, having purchased so many campaign ads for its incumbents with their easy-come, easy-go "donations."

Please don’t forget the rest of us out here, the voiceless and the quietly desperate, who need you – and your like-minded colleagues – to actively fight on behalf of those for whom your public office exists.

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