Health Insurance in Developed Countries


Institutional arrangements for health insurance long predate efficacious courses of therapy or even accurate diagnostic techniques. Let health insurance be a type of insurance in which the benefit payment is triggered by an adverse health event. Nowadays the payment is generally intended to pay the costs of health care: physicians and nurses, equipment, drugs, and hospital care. In the more distant past, the primary cost of ill-health was lost income due to the inability to work. Thus, the initial health insurance schemes set out to replace a sick or injured worker’s pay, occasionally paid for medical care, and often included death or burial benefits for survivors. Throughout Europe, workers formed sickness funds to execute these sorts of risk management measures. They bound themselves into mutual aid societies that required of them regular payments into a jointly kept fund, from which they were eligible to draw benefits when incapacitated and unable to work. Details of such funds differed according to trade, nationality or region, and over time, but their numbers and the number of members they covered grew until the advent of state-sponsored health insurance in the later nineteenth century.

The Medieval And Early Modern Periods

The first health insurance schemes were established in the late middle ages. Because miners endured the greatest risk of accident and death at work, it was reasonable for them to found the earliest sickness funds. The earliest record of a miners’ fund dates back probably to the year of 1300 during the reign of King Wenceslas II of Bohemia. A few early Knappschaftskassen (miner society funds) maintained hospitals for members and townsfolk in mining communities, but most aimed to care for widows and orphans of members killed in accidents. Medical care and short-term sick pay, for four to six weeks, generally came from mine owners. There were exceptions, however, such as the mining law for the region surrounding Trier (1546), which called for a fund managed according to insurance principles of compulsory premium and entitled benefit payments. These benefits financed care and sick pay for up to four weeks.

Miners’ funds continued to grow into the early modern period, aided by complementary legal developments. Twelve German states made membership in Knappschaften compulsory, for example, as in the Prussian Knappschaftsgesetz (miner society law) of 1767. A later Prussian law required poor relief claimants in mining regions to exhaust all available benefits from Knappschaftskassen before receiving any government benefits. Thus began the connection between private (if government aided) health insurance and state entitlements.

Through locally based guilds, other trades also developed sickness funds in the early modern era. Dutch guilds, for example, established separate relief funds for members in the seventeenth century to protect their general operations from unexpected demands during epidemics. These funds took on the structure that characterized private sickness funds for much of the next three centuries. Although these guilds accepted donations, sickness funds required regular contributions from masters, who in turn were compelled to join the guild in order to practice their trade in a particular location. Guild members, that is, masters, who were sick and temporarily unable to work, claimed a small replacement payment to carry them through their illness. Elderly and otherwise needy guildsmen, widows, and orphans were not entitled to assistance, but might receive some aid when there was enough money in the coffers. Journeymen and apprentices were not eligible for such aid as they were to be supported by the master as long as they lived under his roof. Some guilds developed separate funds for apprentices. As early as 1608 in Antwerp, separate apprentice funds appeared for milliners’ and clothmakers’ apprentices and journeymen – and Louvain, Brussels, Ghent, and Bruges soon followed. In a few places, Austria in particular, apprentice and journeymen funds survived into the twentieth century. Compulsory membership in apprentice funds ensured a steady flow of new, young, and relatively healthy members into a guild of fund.

In addition to miners and skilled tradesmen in guilds, voluntary occupation-based relief funds appeared as early as the sixteenth century in Amsterdam, Delft, and Leiden, covering the great majority of journeymen and apprentices. The seventeenth and eighteenth centuries saw rapid growth in these funds as well as increasing labor mobility among their members. To prevent financial destabilization and with the aid of local authorities, many local, occupationally based funds instituted compulsory membership; these appear to have been a minority, perhaps between 10% and 20% of apprentice funds. In a nutshell, a substantial share of workers enjoyed membership in sickness funds by the end of the eighteenth century. In Amsterdam, the proportion was approximately one-third, whereas in other northwestern European cities, it ranged between 25% and 30%.

Friendly societies, as sickness funds were known in Great Britain, covered a variety of workers. They also appeared under the name of ‘box clubs’ to indicate the means of collecting premiums, with a box set to one side of a pub or office. For one century from the later part of seventeenth century, their effectiveness led the elite of the country to call for more such societies to enable care of the poor apart from the provisions of the Poor Laws. Daniel Defoe proposed that the sailors’ mutual aid society in Chatham could be taken as a model. By two contemporary estimates, between 7000 and 10 000 friendly societies covered approximately 700 000 members by the year of 1800, or almost one-third of the adult male population. Although all of these friendly societies paid benefits to members, some paid only burial or widows’ benefits and not sickness benefits.

Nineteenth Century Until 1880

The most celebrated event in the history of government sponsored health insurance occurred late in the nineteenth century: the German adoption of compulsory insurance. This development did not occur in a vacuum. Throughout the nineteenth century, the evolution of the legal environment and the secular expansion of mutual aid society membership set the stage for direct government intervention. The Napoleonic Wars spread the French Revolutionary animus against guild activity through continental Europe. For example, during the French occupation in Ghent, journeymen’s aid societies operated in secret, and they were later joined by elite textile workers’ secret funds. When they were allowed to operate openly in 1827, one third of craft workers were linked to sickness funds. The number of Dutch mutual aid societies grew at this time as well, by 50% from 1800 to 1820, and the number had doubled again by 1850. For profit, commercial insurance, with benefits that replaced pay during sickness or that paid for medical costs, or both, began at this time to cover families having no members in sickness funds. Even before 1842, when physicians themselves started and operated insurance funds that enrolled their patients, nearly one-fourth of Amsterdam’s population was insured against medical expenses.

In Great Britain, the friendly societies proved to be popular among all parts of the working class, both skilled and unskilled. At times, the government wished to encourage this trend, but in general active and prospective members resisted this intrusion, managing and expanding their ranks voluntarily. Early in the nineteenth century efforts to encourage county or ‘patronized’ friendly societies under gentry management came to naught; in 1825, the House of Commons Select Committee on Friendly Societies observed that ‘‘people themselves [prefer] clubs managed by themselves.’’ The societies acted creatively to ensure enrollment of future workers. After the 1820s and 1830s, when some Sunday schools organized sickness funds for students as well as teachers, the Oddfellows and Foresters formed juvenile sickness funds from which, they hoped, full members of their societies would emerge.

In the New Poor Law of 1834, Parliament gave an indirect boost to voluntary enrollments of friendly societies. One intention of Poor Law reformers was to encourage the near poor to attain some degree of financial independence through membership in friendly societies. That is, ideally workers would save for hard times rather than hope for relief from Poor Law related institutions such as parish apprenticeship for unwanted children. The reform seems to have had the intended effect, as the number of societies and the number of members rose in the decade after enactment; thus workers do seem to have been saving more. However, the causative role of the New Poor Law in this trend is open to debate. Grim New Poor Law institutions such as Dickensian workhouses bore no less stigma than parish-level outdoor relief under the old Poor Law; both provided substantial incentives to the working class to avoid public assistance.

Friendly societies grew in geographic extent, membership, and operational sophistication through the mid-third of the nineteenth century. Regional and national groups of societies known as affiliated orders emerged from individual societies and box clubs. There were 163 such federations by 1877, the largest two of which, the Manchester Unity of Oddfellows and the Ancient Order of Foresters, enrolled some 800 000 men in total. Centralization accompanied the process of growth and affiliation, and central offices began to require the submission of data on sickness claims. From here, it was a relatively easy task to engage in actuarial research to produce tables of claim rates and thus expected probabilities of claim rates and benefit payments in the future. The latter part of the century saw societies moving from customary levels of membership dues to actuarially determined rates, in particular rates being differentiated by age. The ability of societies – or alleged lack thereof – to assess sufficient rates to cover their liabilities became a political issue not put to rest until the 1911 National Health Insurance Act, by which the state financed these liabilities. Notwithstanding the advent of an objective actuarial science, the culture of the societies being closely tied to the local pub and its working-class bonhomie, bound members in a truly mutual fashion to examine their own claims and those of their fellows carefully. Societies sent committees of members out to examine claimants, forbade those claimants from entering pubs, and thereby reminded each man of his obligation to the society as a whole. This solidarity was one characteristic of friendly societies that could not carry on past 1911.

Despite occasional efforts to recruit women and children, the primary aim of friendly societies in nineteenth-century Britain was to cover adult men. Exactly which adult men, in class terms, has been a subject of debate. Earlier historians, such as Eric Hobsbawm, had claimed that premium levels were high enough to discourage unskilled workers from joining, so that the membership by and large consisted of skilled workers – the so-called labor aristocracy. Although more skilled and better paid workers may have composed the majority of friendly society members in the first half of the century, recent microstudies of local club membership rosters have found a broader membership base from midcentury onwards. James Riley compared distributions of occupations of Oddfellows to those of Englishmen as a whole late in the century and found a close correspondence. The representativeness of friendly society membership to British society as a whole was perhaps not evident to historians who relied on official and printed sources, and awaited those local historians who were willing to dig into the manuscript record. In any case probably, the large share of the British population who enjoyed friendly society sickness benefits did not differ in any substantial way from the uninsured population.

Later Nineteenth Century Until The Great War

In cultural terms, the German situation was worlds away from that of Great Britain. The English societies had formed out of a tradition of voluntary association whereas the Prussian provident funds, or Hilfskassen, stemmed from compulsory organization of artisan trades through the guilds. That compulsion signals the importance of the state in the development of German funds. Care for ailing and injured journeymen played a particularly important role in the German case. Journeymen had neither the access to resources that masters had nor were they under the responsibility of a particular master, unlike apprentices. As the German states disabled guild influence over members, they required guilds to provide closer assistance to journeymen in need. For example, the Prussian industrial code of 1845 included enabling laws that permitted local authorities to require all journeymen in their jurisdiction to belong to journeymen’s sickness funds. The growth of other workers’ funds was limited to opportunities left open by the lack of state action. In Germany, as in Britain, workers’ sickness funds interacted with Poor Law institutions. One reason for the 1845 enabling law was the Prussian Poor Law legislation of 1842, which shifted the focus of benefit payments from the person’s original place of settlement to his current place of residence. As local communities could no longer rely on guilds to care for distressed journeymen, they were granted powers by the 1845 law to shift that obligation back to the guilds. Between 1849 and 1853, some 226 Prussian municipalities made joining a sickness fund mandatory for workers. Although compulsory membership in sickness funds appears in the historiography as a reaction to the tumult of 1848, it is noteworthy that legal requirements to join these funds have predated the events of that year. A later law, the Emergency Ordinance of 1849, allowed local governments to compel factory workers to join provident funds, to which factory owners were required to contribute, thus placing artisans and factory hands on roughly similar legal footing. Again, the main concern was protecting local poor relief institutions.

Changes in the legal environment around the middle of nineteenth century affected all manner of sickness funds. A rising tide of internal migration, especially well documented in the lower Rhine region surrounding Dusseldorf, concerned local authorities who feared the newcomers would end up on their own poor rolls. The central Prussian government, however, committed itself to freedom of movement. Rather than restrict labor mobility, in 1854 it allowed local communal funds to bill the commune of birth or previous residence of a poor relief recipient for up to a year. The number of funds grew as a consequence. At the same time, the Prussian government dramatically changed its laws regarding property rights to underground resources, with consequences for the miners’ funds, the Knappschaften. Mine owners, rather than the state, would control the disposition of assets and hold the ability to hire and fire miners and to determine their pay rates. Miners’ funds could now set member contributions either as a flat percentage rate, or as a flat rate within a set of fixed categories corresponding to earnings. The rise of Liberal political influence in the 1860s led to the founding of labor union provident funds, which continued under Social Democratic influence. These funds were eager to be treated as others were; that is, to keep their members from being compulsorily enrolled in guild, factory, or communal funds, and thus paying twice over for their insurance. After the 1866 Prussian annexation of territories into the North German Confederation, the Reichstag did in fact issue an Industrial Code in which compulsory membership requirements could be met by joining a ‘free’ or voluntary membership fund, such as those operated by labor unions.

Over the course of the 1860s, the status of voluntary and compulsory funds, those ’free’ of government regulation and others overseen by local government or business officials, those operated by trade unions that permitted member mobility and communal funds that did not, became muddled. Court opinions contradicted one another, and the confusion led communal authorities to cease requiring residents to join provident funds. The central government found the wide range of premiums, benefits, and claim requirements unsatisfactory, but politically untouchable at that time. One result of this relatively laissez faire approach to insurance regulation was the outburst of growth in both the number of funds and the number of workers they covered. Between 1860 and 1870, the number of funds for skilled craft workers rose by 29% whereas the number of covered craft workers rose by half. Over the same period, the number of funds for factory workers doubled, as did the number of such workers who were covered.

In 1876, the central government of what was then the German Empire finally achieved its goal of standardization through the Law on Provident Funds. At least nominally, the legal requirements of similar benefits, and thus similar premiums to pay for them, among the voluntary funds meant that they could not be used as an expedient method of avoiding the higher-priced, higher-benefit level compulsory funds. To do this, the central government created a new category of registered funds, membership in which might be either compulsory or voluntary, and benefits from which were strictly regulated within certain minimum and maximum time periods and levels. In addition, these funds were required to end their provision of benefits for anything other than sickness and injury, such as death benefits for widows and orphans, or partial pay benefits for striking members. Besides forbidding fund members to participate in strikes, this law also forbade investments of fund reserves in the sponsoring firm, thus detaching the funds from both workers and employers in one stroke.

For various reasons, the state’s interest in health insurance regulation did not end there. In a strategic view, Bismarck wished to soften the blow of the first Anti-Socialist Law of 1878 among the working classes, and to co-opt them into believing that the state, rather than removing their political voice, was providing for them materially. This explains Bismarck’s initial efforts to fund compulsory insurance through employer contributions and taxes: ‘‘If the worker must pay, the effect on him is lost,’’ he said, because then the worker could see that he himself and not the state had produced the resources that paid for the benefits. From a more tactical perspective, the need for widespread (but not universal) compulsory health insurance arose from gaps in the current state of accident insurance that stemmed from the Accident Liability Law of 1871. Efforts to update the state of accident insurance stalled in the 1882–83 session of the Reichstag, and so the relatively uncontroversial provisions for health insurance were removed and placed in a separate bill. With accident insurance to be made compulsory across the Empire by a bill that assigned responsibility for the first several weeks of disability to the sickness insurance funds, it would not do to have pockets of worker autonomy concerning sickness insurance. Hence, the 1883 Sickness Insurance Law entered the books before the 1884 Accident Insurance Law.

The new Sickness Insurance Law built on the existing network of small sickness funds. It made membership in a sickness fund compulsory for a large class of workers who earned less than 2000 marks per year. In addition, employers contributed to sickness funds at a rate of one mark for every two paid as dues by the employee, but there was to be no state funding. By inspecting employer records, cross-checking fund membership lists, and threatening employers of uninsured workers with fines, the state effectively enforced coverage requirements. For workers who toiled in other sectors, such as agricultural laborers and domestic servants, and for those workers who earned more than 2000 marks annually, membership was voluntary. Registered aid and state-registered aid funds covered those outside the compulsory system who chose to join voluntarily. The network of health insurance funds covered a large share of the working class though not immediately. Enrollment in 1885 numbered some 4.5 million, or almost a tenth of the population; by 1906, the covered share of the nonagricultural labor force (not population) had risen to approximately 70%.

Despite the broad extent of coverage, the systems still confronted problems of moral hazard and physician agency. The statutory minimum wage replacement rate was one-half, but many funds paid 60% or 70% of a worker’s usual earnings to disabled members. One consequence was a steadily increasing number of missed workdays due to sickness absence. In 1885, the first year with comprehensive statistical data, the average covered worker missed six days of work due to illhealth. By 1908, that number had risen to nine days per year, an increase of 50 percent. Over this time, workers did not change the rate at which they submitted claims, so the increase in sick time was due to longer spells of sickness. For example, in establishment funds operated by particular firms, the average duration of illness rose from 12.5 days in 1885 to more than 18 days in 1908, an increase of nearly a week per sickness event. The upward trend was not affected by the 1903 law that increased the mandatory maximum duration of insured sick time from 13 to 26 weeks. Among funds in which membership was compulsory, both the frequency of sickness spells and their duration were strongly and positively associated with the level of sick pay, suggesting a moral hazard in which the availability of sick pay increased the time spent off work. Indeed, the German-American statistician Frederick Hoffman proposed that the fundamental problem behind increasing absenteeism among insured German workers was not their worsening health but rather their ‘dishonesty, deception, and dissimulation’ regarding missed work time.

Similar problems appeared in miners’ sickness funds. Up to the turn of the twentieth century, miners had averaged between six and eight days per year of absence, but after 1900 or so, that figure jumped to as high as 12 days per year. As one observer noted, ‘‘[F]requent malingeringyin the Ruhr area led to a great increase in costs.’’ In response, Knappschaften ended sick pay for Sundays and introduced waiting periods that acted as a kind of deductible. Still, here too, later research found a strong, positive, and significant correlation between sick pay and absenteeism rates.

To deal with these problems, the system developed an elaborate process of obtaining second opinions. To receive sick pay benefits in the first place, a worker’s claim needed to be approved by a physician associated with the fund. In German funds that offered free choice of physician, fund-employed doctors monitored independent physicians by performing second examinations. Both funds and their members enjoyed the right to demand a second opinion from a variety of ‘confidential medical advisors,’ either fund-employed physicians or committees were composed of physicians’ and insurers’ representatives. The results of the second opinions suggested that the physician-agent’s diagnosis depended on the identity of the principal. Given free choice of physician paid by capitation, as in most compulsory funds, patients were the principals, and physicians who gave initial diagnoses of incapacitation were their agents. Medical advisors who monitored the primary physicians, on the other hand, were agents of the insurers. Probabilities of claim approval reflected these relationships. A report of fund groups in several northern cities during 1909 and 1910 indicated that whereas initial consultations tended to favor the worker, second examinations favored the fund. Between one-eighth and onethird of workers who had obtained statements from their own physician attesting to their incapacitation returned to work rather than be examined by a fund doctor. These workers either recovered quickly or lacked confidence in the veracity of their claims. German workers, physicians, and their supervisors all understood the implications of agency. Physicians wanted to keep even their most annoying patients, who frequently presented with dubious symptoms, in order to maintain the capitation fees that accompanied them. Contemporary observers asserted that personal physicians thus gamed the system by approving questionable claims. The fund’s medical advisors then routinely rejected the claims at the second opinion stage, thereby keeping the fund financially healthy and the attending physician’s pay intact, while allowing him to blame the second physician for the rejection.

During the later nineteenth century, other forms of health insurance expanded their coverage in continental Europe. With the exception of sickness funds for miners in France, membership in them was voluntary rather than compulsory. And that membership grew. French membership in adult funds, which accepted a measure of government supervision, tripled to 2.5 million from 1886 to 1905, whereas free funds, which operated without such oversight, grew by more than a third to 425 000. Similarly in Belgium, recognized funds under government oversight grew nearly ten-fold to a quartermillion members from 1885 to 1904. In Denmark sickness societies, heavily subsidized by the government, tripled their enrollments between 1895 and 1905, with another 20 percent growth by 1907.

These sickness funds managed a different set of problems from the compulsory German sickness societies previously discussed. All voluntary funds faced the threat of adverse selection, including the voluntary German funds that descended most directly from Poor Law institutions. To manage the problem of cultural differences in determining whether a worker was too sick to work, absence records from both voluntary and compulsory funds within Germany were compared to each other in the region of Leipzig. Here, membership rolls in the voluntary funds skewed older than those in compulsory funds, which suggested selection biases into membership. But then controlling for the age categories of members, voluntary funds had much higher absenteeism rates than compulsory funds among same-aged workers, which suggests that the voluntary funds were especially attractive to those in poorer health at every age. Members of voluntary funds who were in their early 20s had extraordinarily high sickness rates, nearly as great as those of men in their 60s. A contemporary German observer has explained the reason in a classic adverse selection statement: ‘‘Practically all the male population, including the weaker and those who are physically less valuable, are sent to work in the earlier ages [i.e., and then they join compulsory funds]; in a few years, however, the weaker persons must give up the occupations in which they are engaged, but realizing their need for insurance, continue their membership as voluntary members.’’

In voluntary French and Belgian funds, such difficulties were compounded by the financial need for ‘honorary’ members. These were civic-minded men of the bourgeoisie whose membership required them to contribute premium payments but did not allow them to claim benefits. Their presence in sickness associations diluted the solidarity among rank and file members that was necessary for them to function efficiently. Both France and Belgium relied on mutual aid societies to care for sick workers through their benefit funds, with the few workers employed by large firms enrolled in establishment funds. A manual for sickness fund managers addressed a widespread concern with selection bias by recommending rejection of all applicants over the age of 40 due to ‘‘the risk of illness [being] considerably augmented after that age.’’ French benefits were in line with those elsewhere. A large fund for store clerks in Paris charged its members two francs per month in dues and offered sick pay benefits of two francs per day for not more than 60 days plus the attention of a physician employed by the fund. Belgian funds were less generous. One coal mining company fund replaced only 22% of a miner’s pay, but paid these benefits for the first six months of illness. Dependence on scarce honorary members kept Belgian dues relatively high, leading a contemporary to complain, ‘‘It is the e´ lite of the working class alone that can stand the cost of sick insurance.’’

Financial problems plagued French and Belgian sickness funds as memberships aged and claim rates rose beyond the ability of fund assets to service. French establishment funds became even more dependent on subsidies from sponsoring firms. Among all French funds, the value of assets per participating member (excluding honorary members) fell by onequarter from 1898 to 1905, whereas this measure rose by 10% among compulsory German funds. The historian Theodore Zeldin summarized the situation of the French societies thus: ‘‘Ignorance of the principles governing insurance was common, methods of administration amateur in the extremey…The most serious omission was that the whole movement was never established on an actuarial basis.’’ Similarly, Belgian funds endured chronic financial difficulties due to their lack of actuarial soundness. A government official at the time conceded that the societies’ sick funds could, in theory, ‘‘be scientifically managed,’’ but in fact ‘‘the mutual sick-benefit societies do not fulfill the necessary requirements of a safe and rational organization.’’ These difficulties led Catholic and Socialist legislators to agree on the need for compulsory insurance in 1912.

Consequences of sickness insurance benefits varied according to the voluntary or compulsory nature of membership. As noted above, availability of sick pay seemed to induce German workers to take additional days off, and the pattern of increasing sickness time appeared in other compulsory funds as well: in Austria and among German and French miners. Whether those days were truly evidence of malingering, or whether workers could finally afford to take necessary time off work to recover, cannot be determined from statistical analysis. Among workers who belonged to voluntary funds in France, Belgium, and Denmark, however, after about 1890 paid absenteeism began a slow and steady decline for some years. This trend is unlikely to have been caused by improving worker health. Rather, it stemmed from the financial inability of these funds to support previous levels of absenteeism benefits. French physicians, employed directly by sickness societies, ceased to approve absence benefits so readily after being ordered by fund managers to cut costs. Later, in the 1930s, Belgian funds adopted denial of benefits as an explicit policy to keep their accounts in balance. Statistically, greater expenditures per sick day on medical benefits were associated with briefer spells of absence, which may have been due to physician visits resulting in orders to return to work, at least among the voluntary funds. The French physician and statistician Jacques Bertillon wrote in 1892:

The fact is that when these societies grant compensation they attach less importance to their regulations than to the state of their till. A rich society gives its help more liberally than a poor one; and this is absolutely the sole cause of the large English societies, which are often very old and generally rich, granting more daily indemnities than the French (for instance), who are obliged to exercise the strictest economy.

Given the limited efficacy of therapeutics in the late ninteenth and early twentieth century, the primary benefit of sickness insurance coverage was the sick pay benefit that enabled workers to take time off to recuperate. This rest enabled workers to recover from illness and injury sufficiently regularly to influence mortality rates. Various studies had found that more expansive sickness insurance coverage, whether compulsory or voluntary, was associated with reductions in mortality rates in general. In particular, infant mortality rates were also lower as coverage expanded, probably as a result of confinement benefits. Those benefits also led to relative increases in fertility rates. Finally, persuasive evidence has been adduced to show that the availability of sickness insurance in Germany had reduced the rates of emigration at the turn of the century. Thus, health insurance had measurable influences on all manner of demographic measures throughout early twentieth-century Europe.

Growth of health insurance (as it came to be called) in Great Britain trod its own path quite different from developments on the European continent. The German government was committed to elaborate intervention into, but not subsidies for, health insurance markets, and the French were equally committed to upholding a worker’s choice of joining a benefit society or not. In the British case, a far larger share of working class men belonged to friendly societies than in France or even in Germany before 1883, which mitigated the perception that government action was needed to insure workers and also created a formidable political barrier to such action. The Liberal government launched its welfare reforms only in 1906, because until that time the great concern had been to care for the elderly who had simultaneously been pushed out of the labor force by younger workers and pushed into the embarrassment of outdoor relief. How exactly to deal with the deserving aged poor remained a conundrum until the 1908 Old Age Pensions Act provided tax-financed pensions to the elderly. This landmark Act thus moved the responsibility for care of the elderly from local Poor Law Guardians to the national government.

The unusual calls for two general elections in 1910 gave the government time and space to consider the next step of compulsory health insurance. In 1907, a young William Beveridge suggested that provision of unemployment insurance could potentially mitigate a great deal of poverty, and then in 1908 after passage of the Old Age Pensions Act, David Lloyd George visited Germany for five days to study the possibilities for a similar national health insurance program in Britain. The combination of these two events led to the National Insurance Act of 1911. The health insurance aspect of the Act, as distinguished from its unemployment insurance provisions, was to be funded by weekly contributions. Unlike in the German system, these contributions were fixed as flat rates, thus imposing more of a burden on lower-paid workers. Employed men paid four pence, employed women three pence, their employers three pence, and the state two pence weekly. Coverage automatically applied to all manual laborers and to all over age 16 who earned less than d160 per year, the equivalent of 3200 marks. Insured workers could obtain free medical care from a physician who belonged to a local medical committee. Workers were eligible for a sick benefit of 10 shillings per week for men (seven shillings sixpence for women) for up to 26 weeks. After 26 weeks, an ill or injured worker might apply for a disability benefit of five shillings per week.

As the Bill proceeded through Parliament, it changed considerably. Originally, Lloyd George had intended for friendly societies to perform much of the administration of this insurance, but concluding that commercial insurers were much sounder in actuarial terms, he shifted the load of management toward them. During consideration of the National Health Insurance Bill in 1911, the British Medical Association persuaded the government to allow free choice of physician as part of a larger development that excluded more approved friendly societies from the system. Thus the great distinction today between German management of health care finance, where insurance funds determine the levels and distribution of expenditure on health care, and the British method, wherein such decisions are made by the state, is one that dates back to the early twentieth century.

After 1918

The British economy staggered out of its victory in World War I into an uneasy peace. In 1919, the earnings limit for mandatory insurance increased to d250, almost keeping pace with wartime inflation. The next year contributions rose to five pence for both men and women, and the standard benefit was increased to 15 shillings per week for men and to 12 shillings for women. Over the entire interwar period, the share of the male population entitled to benefits rose steadily from 51% to 63%; the associated share of women rose from 23% to 30%. During the high unemployment era of the 1930s, the sick pay benefit offered through the national health insurance program began to look better for workers when the comparable benefits available through unemployment insurance and workmen’s compensation (accident insurance) expired. One result was that workers who became unemployed tended to make claims of ill-health against the national health insurance plan when their unemployment benefits ended. Thus, as unemployment rose during this period, so did sickness claims. From 1921 to 1927, sickness claims by men rose by almost half, as did long-term disability claims. In actuarial terms, the ratio of actual to expected costs of disability benefits for men increased by 80% in Britain between 1922 and 1935. The possible substitution of sick for unemployment benefits produced an acute strain on the insurance program’s finances.

In May 1940, the Chamberlain government fell after the loss of Norway to the Germans. Only a year later, the coalition government led by Winston Churchill appointed William Beveridge to chair a new committee on the reform of social insurance. Beveridge’s famous report of 1942 determined the course of the British welfare state for a generation after the war. It aimed to create a unified system of social insurance for the entire population, and not just manual workers. The safety net was to cover workers and their dependents against ill-health, unemployment, and old age, and was to be financed through general taxation funds. In the wake of successive reports from the Committee on Medical Insurance and Allied Services (1920), the Royal Commission on National Health Insurance (1926), and the British Medical Association (1930 and 1938) that emphasized the shortcomings of the existing arrangements, the Beveridge Report recommended replacing compulsory insurance for most workers with a comprehensive national health service for the entire population. British physicians fought the imposition of a salaried state medical service right up to the formal establishment of the national health service in 1948.

In France, settlement of the Great War undermined French notions of individual choice of insurance from within. After the Franco Prussian War of 1870–71 the German Empire annexed the former French Alsace-Lorraine. Inhabitants of the region were integrated with the German project of compulsory sickness insurance from its start, and by the time of the Treaty of Versailles, they were in no hurry to return to the status quo of 1870. In response to the threat of an independence movement, the French government promised Alsatian labor unions that it would maintain health, disability, and old age insurance substantially as they had been, and hinted at even using these arrangements as a potential model for the rest of France. French physicians aimed to prevent such developments, but eventually they compromised with the government and allowed the first form of compulsory insurance to be established in 1930. This insurance reimbursed patients for 80% of their medical bills. The downside of this agreement was that individual physicians felt no compulsion to abide by fee schedules negotiated on their behalf by medical groups. The share of covered population (not labor force) rose to almost 25%, but unexpected expenses and denials of benefits increased political discontent with the scheme.

The next step in French insurance policy occurred during World War II. It was conceived not in France itself but by the Free French government in London, and then enacted in 1945. The necessary relationship between employment and insurance coverage ended, thereby enrolling greater numbers of the insured. In qualitative terms, this expansion of the Securite´ Sociale also proposed to limit increases in physician billing rates. By some accounts, this represented a missed opportunity to do away with fee for service medicine altogether and leap ahead to the system that began to be implemented after the 1960 reforms. Still, the postwar reforms succeeded in bringing ‘the quasi-totality of the population’ under coverage – a Gallicism meaning almost three-fourths, roughly same as the share of Americans with hospital insurance. But again, costs rose faster than expected, making it impossible to keep the French budgets in balance.

The Dutch interwar experience offered a fine example of the ability of a totalitarian government to break legislative deadlocks and impose politically unpopular compulsory insurance. By the end of the nineteenth century, a wide variety of sickness insurance funds was operating in the Netherlands: some formed as mutuals by groups of workers, others sponsored by employers or trade unions, still others by local governments, a few operated by commercial insurers, and a unique set of funds were operated by physicians. And here things stayed due to Parliamentary impasses. From the Great War onwards, every effort to enlarge the government’s presence in health insurance markets halted due to unwanted amendments, parliamentary deadlock, dissolved governments, and other flotsam of a democratic polity. The arrival of Nazi occupation forces ended the stalemate. To bring the Netherlands in conformity with the German example, the occupiers promulgated a compulsory sickness fund decree that broke through the parliamentary clutter and established government health insurance once and for all. As for Belgium, the Allied breakout from Normandy caused the Germans to put Nazifying health insurance on hold. But soon after liberation, the Belgians too enacted compulsory insurance. Thus in the Low Countries, both occupiers and the occupied looked upon government health insurance as an idea whose time had arrived by the mid-twentieth century.

Elsewhere in the world, the rise of government intervention in health insurance markets awaited the second half of the twentieth century. In the middle of this century, the Canadian situation was in flux. Canadian physicians had become more sympathetic than their American counterparts to the prospect of state action, and the Canadian Medical Association was participating in the reform process. Creation of government insurance occurred first in the West, where Saskatchewan, British Columbia, and Alberta had adopted a tax-funded hospital insurance program. Newfoundland had already created a health insurance program that covered half the population by the time it entered the Confederation in 1949. The success of government hospital insurance in these provinces led to the Hospital Insurance and Diagnostic Services Act of 1957, by which the federal government subsidized hospital insurance in all the provinces. Pushing the principle of state insurance further, the provincial government of Saskatchewan established Medicare, as the Canadian single payer medical insurance system came to be known, in 1962. This triggered a bitter and ultimately unsuccessful strike by the province’s physicians. The strike’s failure caused a loss of political capital by the most important opponents of an expanded government role, and this in turn opened the door to further state intervention. The pressure for national health insurance became so great that even the physicians did not want to be seen in opposition to it, and they again moved to work with governments on the shape of insurance policy. Pushing the principle of state insurance further, the provincial government of Saskatchewan established Medicare, as the Canadian single payer medical insurance system came to be known, in 1962.

Nor has the notion of health insurance been restricted to only Europeans and their descendants. Compulsory health insurance for industrial workers began in 1950 in Taiwan, in part as a political effort to improve the protection from the risk of ill-health enjoyed by Taiwanese workers relative to those in the People’s Republic. From its initial remit of coverage for workers in public factories and mines, the government expanded this health insurance to workers in private in private industry, smaller manufactories, and fisheries by 1953. Beginning in 1958, it extended compulsion to government workers and teachers, and then all industrial workers, and eventually nearly all workers, including those in agriculture. By the time of national health insurance in 1995, there were few uninsured Taiwanese remaining.

In Latin America, the more prosperous countries have succeeded in enrolling a large share of the population in health insurance of some kind. By 1986, Argentina, Brazil, Costa Rica, Mexico, Panama, Uruguay, and Venezuela offered medical care coverage to 71% of their combined populations. The covered populations tended to be city-dwellers, who were relatively easy to reach and relatively able to afford the premiums. Five of these countries covered spouses and children of the insured, and of the remaining two, Uruguay provided maternity and pediatric care whereas Panama excluded only hospital care from coverage. The origins of these programs date to much earlier in the twentieth century. For example, in the 1920s, Brazil created a variety of social insurance funds for various kinds of workers in different parts of the country. Over the next several decades, legally mandated amalgamation reduced the number of social insurance funds to seven large funds that represented major occupational groups, including rural workers.


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Theory Of Demand For Health Insurance
Historical Analysis of Health Insurance