The Great Depression of the 1930s devastated the health insurance industry. Millions of people lost their jobs and had little money to pay for “extras” like insurance, so few bought new policies and many stopped paying the premiums on their existing policies

Many people falsely claimed sickness disability benefits, since these benefits were sometimes the only possible source of income for someone who could not find a job. As a result, the claims that companies paid rose in relation to the premiums they received.

As damaging as the Depression was, there were many positive developments during this period. Companies became more financially cautious, which helped bring about a more stable industry with fewer company failures

A new spirit of cooperation emerged-companies became more willing to share with each other information about the claims that they paid, and actuaries and underwriters were able to use this information to set premiums at competitive but adequate levels

Medical expense insurance, which had been pioneered in the 1920s, developed and spread, and employment-based group health insurance, on which the modern health insurance environment is centered, emerged.

The Development of Medical Expense Insurance

Medical expense insurance differs from the earlier sickness insurance in that benefits take the form of reimbursement for the actual cost of hospital, surgical, and medical services, not a lump-sum payment for days of illness

The first form of medical expense insurance was individual hospital expense insurance, which was written in the 1920s. This insurance covered only hospital services (not surgeons’ or physicians’ services) and was first offered by hospitals themselves

The first group hospital expense insurance policy was written in 1929. Baylor University Hospital in Dallas, Texas insured 1,500 school teachers who were members of a mutual benefit society. The benefits provided were up to 21 days a year of semiprivate room and board and necessary hospital services and supplies.

Health Insurance in the Early 20th Century

During the Depression, hospitals were faced with declining revenues as people without jobs could not afford to pay for hospital care. As a solution, many hospitals adopted the group hospital expense insurance plan pioneered at Baylor

Many people who could not pay large hospital bills could pay small premiums, and these premiums provided the hospitals with income

Around the country several hospitals in the same state or part of a state banded together to offer this kind of insurance. This was the origin of the Blue Cross plans.

Group hospital expense insurance was also provided by employers and commercial insurers. This first occurred in 1934, when the General Tire & Rubber Company asked its insurer to add hospital expense benefits to the group insurance program it provided for its employees.

Hospital expense insurance covered only services provided by hospitals, not surgeons’ fees nor physicians’ charges for hospital, home, and office visits. This gap was filled when commercial insurers introduced group surgical expense benefits beginning in 1938, followed by group medical expense benefits to cover physicians’ visits in 1943

Physician-sponsored surgical-medical coverage was first offered in 1939, when the state medical society in California established the California Physicians’ Service, a statewide plan. This was the first of the Blue Shield surgical-medical Health Insurance in the Early 20th Century

Labor unions have been active in the United States since the mid-19th century, but before the Depression only a small minority of workers were union-members.

In the 1930s and 1940s unions grew dramatically and gained increased leverage in negotiating with employers. One of the things that unions began to demand was employer-sponsored group health insurance, and in 1948 the National Labor Relations Board ruled that unions had a right to make this demand as part of collective bargaining.

The Supreme Court confirmed this ruling in 1949. As a result, employment-based group health insurance became the norm for unionized labor. Most unionized companies offered group health insurance to their nonunion managerial employees as well.

The growth in employment-based group health insurance was also encouraged by federal tax policy. Employers were allowed to deduct as a business expense their expenditures for employee health coverage. And individuals did not have to pay income tax on employment-based health coverage-even though it was given to the employee by the employer it was not considered taxable income. This made health insurance attractive to both businesses and employees.

The Spread of Employer-Sponsored Group Health Insurance

Employer-sponsored group health insurance plans (which centered on medical expense coverage) experienced tremendous growth in the 1940s. This growth was spurred by war-time wage controls, labor union demands, and tax policy.

During World War II, in an effort to control inflation, the federal government prohibited industrial employers from raising wages or prices. This meant that although labor was scarce because so many people were in the military, employers could not raise salaries to attract and retain workers. But providing fringe benefits, including health insurance, was not forbidden, and this is what many employers did.