Healthcare history: How U.S. health coverage got this bad

In the U.S. healthcare system, even the simplest act, like booking an appointment with your primary care physician, may feel intimidating. As you wade through intake forms, insurance statements, and research out-of-network coverage, you might wonder, “When did U.S. healthcare get so confusing?”

Short answer? It's complicated. The history of modern U.S. healthcare spans nearly a century, with social movements, legislation, and politics driving change.  

Take a trip back in time as we highlight some of the most impactful legislation and policies that gave us our existing healthcare system, highlighting how and when things got complicated. 

History of U.S. healthcare

• 1930s- Great Depression and the birth of health plans that primarily covered the cost of hospital stays

• 1942- Creation of employer-sponsored healthcare in the wake of wage freezes

• 1965- Medicare and Medicaid debut

• 1986- COBRA is signed, offering former employees the opportunity to stay on employer healthcare

• 2010- Affordable Care Act signed into law

• 2019- ICHRAs introduced

Past is prologue

In the beginning, American doctors were kindly old men who stepped out of a “Saturday Evening Post” cover illustration to make house calls. If their patients couldn’t afford their fee, they’d accept payment in chicken or goats. Healthcare was relatively affordable and accessible.

Then it all fell apart during the Great Depression of the 1930s. That’s when hospital administrators started looking for ways to guarantee payment. According to the American College of Healthcare Executives, this is when the earliest form of health insurance was born. Interestingly, doctors would have none of it at first. The earliest health plans covered hospitalization only.

A new set of challenges from the Second World War required a new set of responses. During the Depression, there were far too many people and too few jobs. The war economy had the opposite effect. Suddenly, all able-bodied men were in the military, but somebody still had to build the weapons and provision the troops. Even with women entering the workforce in unprecedented numbers, there was simply too much to get done. The competition for skilled labor was brutal.

A wage freeze starting in 1942 forced employers to find other means of recruiting and retaining workers. Building on the workers’ compensation plans that had recently been mandated, employers or their union counterparts started offering insurance to cover both hospital and doctor visits.

Of course, the wage freeze ended soon after the war. However, the tax code and the courts soon clarified that employer-sponsored health insurance was non-taxable. 

The start of Medicare and Medicaid

Medicare, a government-sponsored health plan for retirees 65 and older, debuted in 1965. Nowadays, Medicare is offered in Parts A, B, C, and D; each offering a different layer of coverage for older Americans. As of 2023, more than a quarter of all U.S. adults are enrolled in Medicare. 

The structure of Medicare is not dissimilar to universal healthcare offered in other countries, although the policy covers everyone, not just people over a certain age. 

Medicaid was also signed into law with Medicare. Medicaid provides healthcare coverage for Americans with low incomes. Over 74 million Americans are enrolled in Medicaid today. 

Nixoncare?

The Obama administration was neither the first nor the last to champion new ways to provide healthcare coverage to a wider swath of Americans.

The first attempts to harmonize U.S. healthcare delivery systems with those of the other developed economies came just five years after Medicare and Medicaid. Two separate bills were introduced in 1970 alone. Both bills aimed to widen affordable health benefits for Americans, either by making people Medicare-eligible or providing free health benefits for all Americans. As is the case in lots of legislation, both these bills died, even though there was bipartisan support. 

But the chairman of the relevant Senate panel had his own bill in mind, so that’s the one that got through the committee. It effectively said that all Americans were entitled to the kind of health benefits enjoyed by the United Auto Workers Union or AFL-CIO — for free. But shortly after Sen. Edward Kennedy began hearings on his bill in early 1971, a competing proposal came from an unexpected source: Richard Nixon’s White House.

President Nixon’s approach, in retrospect, had some commonalities with what Obamacare turned out to be. There was the employer mandate, for example, and an expansion of Medicaid. It favored healthcare delivery via health maintenance organizations (HMOs), which was a novel idea at the time. HMOs, which offer managed care within a tight network of healthcare providers, are descended from the prepaid health plans that flourished briefly in the 1910s and 1920s. They were first conceived in their current form around 1970 by Dr. Paul M. Ellwood, Jr. In 1973, a law was passed to require large companies to give their employees an HMO option as well as a traditional health insurance option.

But that was always intended to be ancillary to Nixon’s more ambitious proposal, which got even closer to what we have now after it wallowed in the swamp for a while. When Nixon reintroduced the proposal in 1974, it featured state-run health insurance plans as a substitute for Medicaid — not a far cry from the tax credit-fueled state-run exchanges of today.

Of course, Nixon had other things to worry about in 1974: inflation, recession, a nation just beginning to heal from its first lost war — and his looming impeachment. His successor Gerald Ford tried to keep the proposal moving forward, but to no avail.

But this raises a good question: If the Republican president and the Democratic Senate majority both see the same problem and have competing but not irreconcilable proposals to address it, why wasn’t there some kind of compromise? What major issue divided the two parties?

It was a matter of funding. The Democrats wanted to pay for universal health coverage through the U.S. Treasury’s general fund, acknowledging that Congress would have to raise taxes to pay for it. The Republicans wanted it to pay for itself by. Charging participants insurance premiums, which would be, in effect, a new tax. It’s hard to believe that’s where it all fell apart, but it’s also hard to believe that Matthew McConaughey won an Oscar, but both these things are true.

The birth of COBRA coverage

The next significant legislation came from President Reagan, who signed the Consolidated Omnibus Budget Reconciliation Act (COBRA) in 1985. COBRA enabled laid-off workers to hold onto their health insurance — providing that they pay 100% of the premium, which had been wholly or at least in part subsidized by their erstwhile employer. While COBRA offers continued coverage, its high expense doesn’t offer much relief for the unemployed. A 2006 Commonwealth Fund survey found that only 9% of people eligible for COBRA coverage actually signed up for it.

The COBRA law had a section, though, that was only tangentially related. The Emergency Medical Treatment and Active Labor Act (EMTALA), which was incorporated into COBRA, required all emergency medical facilities that take Medicare – that is, all of them – to treat patients irrespective of their insurance status or ability to pay. As Forbes staff writer Avik Roy wrote during the Obamacare debate, EMTALA has come to overshadow the rest of the COBRA law in its influence on American healthcare policy. We’ll return to that point soon.

The Clinton debacle

So it wasn’t until the 1990s that Washington saw another serious attempt at healthcare reform. Bill Clinton’s first order of business as president was to establish a new healthcare plan.

For the first time, the First Lady took on the role of heavy-lifting policy advisor to the president and became the White House point person on universal health care. Hillary Clinton’s proposal mandated:

• Everyone enrolls in a health coverage plan 

• Subsidies would be provided to those who can’t afford it

• Companies with 5,000 or more employees would have to provide such coverage  

The Clintons’ plan centralized decision-making in Washington, with a “National Health Board” overseeing quality assurance, training physicians, guaranteeing abortion coverage, and running both long-term care facilities and rural health systems.

The insurance lobbyists had a field day with that. The famous “Harry and Louise” ads portrayed a generic American couple having tense conversations in their breakfast nook about how the federal government was going to come between them and their doctor. By the 1994 midterms, any chance of universal healthcare in America had died.

In this case, it wasn’t funding, but the debate between big and small governments that killed the Clinton reform. It would be another generation before we’d see universal healthcare take the stage.

The birth of Obamacare

Fast-forward to 2010. It was clear that employer-sponsored plans were vestiges of another time. They made sense when people stayed with the same company for their entire careers, but as job-hopping and layoffs became more prevalent, plans tied to the job became obsolete.

Thus the Affordable Care Act (ACA) was proposed by Barack Obama’s White House and squeaked by Congress and the Supreme Court with the narrowest of margins. 

The ACA introduced an individual mandate that requires everyone, regardless of job status, to have health insurance. It set up an array of government-sponsored online exchanges where individuals could buy coverage. It also provided advance premium tax credits to defray the cost to consumers.

But it didn’t ignore the fact that most people were already getting health insurance through work, and a significant proportion of them didn’t want to change. So the ACA also required employers with 50 or more full-time equivalent employees to provide health coverage to at least 95% of them. The law, nicknamed Obamacare by supporters and detractors, set a minimum baseline of coverage and affordability. The penalty for an employer that offers inadequate or unaffordable coverage can never be greater than the penalty for not offering coverage at all.

The model for Obamacare was the healthcare reform package that went into effect in Massachusetts in 2006. The initial proposal was made by then-Governor Mitt Romney, a Republican who now serves as a senator from Utah.

What came next

Despite an onslaught of court challenges, Obamacare remains the law of the land. For a while, Republican congressional candidates ran on a “repeal-and-replace” platform plank, but even when they were in the majority, there was little legislative action to do either.

Still, Obamacare is not the last word in American healthcare reform.

Since then, there have been two important improvements to Health Reimbursement Arrangements, through which companies pay employees back for out-of-pocket medical-related expenses. HRAs had been evolving informally since at least the 1960s but were first addressed by the Internal Revenue Service in 2002.

Not much more happened on that front until Obama’s lame-duck period. In December 2016, he signed the bipartisan 21st Century Cures Act, which was mainly a funding bill supporting the National Institutes of Health as it addressed the opioid crisis. 

But, just like the right to free emergency room treatment was nested in the larger COBRA law, the legal framework of Qualified Small Employer Health Reimbursement Arrangements was tucked away in a corner of the Cures Act. 

QSEHRAs, offered only by companies with fewer than 50 full-time employees, allow firms to let their employees pick their insurance coverage off the Obamacare exchanges. The firms pay the employees back for some or all of the cost of those premiums. The employees then become ineligible for the premium tax credit provided by the ACA, but a well-constructed QSEHRA will meet or exceed the value of that subsidy.

That brings us to one last innovation, which expands QSEHRA-like treatment to companies with more than 50 employees or aspiring to have them.

Introducing ICHRAs

Individual Coverage Health Reimbursement Arrangements, or ICHRAs, were established by a 2019 IRS rule.

ICHRAs allow firms of any size to offer employees tax-free contributions to cover up to 100% of their individual health insurance premiums as well as other eligible medical expenses.

Instead of offering insurance policies directly, companies advise their employees to shop on a government-sponsored exchange and select the plan that best suits their needs. Employer reimbursement rather than an advance premium tax credit reduces premiums. And because these plans are already ACA-compliant, there’s no risk to the employer that they won’t meet coverage or affordability standards.

Let’s face it—we’re never going back to the mid-20th century model of lifetime employment at one company. Now, with remote employees and gig workers characterizing the workforce, the portability of an ICHRA provides some consistency for those who expect to be independent contractors for their entire careers. Simultaneously, allows bootstrap-phase startups to offer the dignity of health coverage to their Day One associates.

How we got here, where we’re headed — a fairer, kinder healthcare system

The U.S. healthcare system can feel clunky and confusing to navigate, and in many ways, it is a regressive system that penalizes startups and small businesses. For a country founded by entrepreneurs, it’s sad that corporations like Google pay less for healthcare per employee than a small coffee shop in Florida.

In many ways, ICHRA democratizes procuring healthcare coverage. And, in the same way that large employers enjoy the benefits of better rates, ICHRA plan quality and prices improve as the ICHRA risk pool grows. Moving away from the traditional employer model will change the incentive structure of the healthcare industry. Insurers will be able to compete and differentiate on the merits of their product. They will be incentivized to build products for people, not one-size-fits-all solutions for employers. 

With Thatch, insurers can build brand loyalty and keep members long-term — rather than seeing them churn with every job change. They can make long-term investments in their members’ health, reaping the profits of lower claims over longer time horizons. We believe we can help transform US healthcare into an efficient, fair, free market system worthy of admiration and respect across the globe. That’s what gets us up in the morning.