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When America First Realized It Had a Problem With Health-Care Costs

A group of experts gathered in Chicago 85 years ago to figure out how to pay for health care. The fight was nasty then, and it’s only gotten nastier.

Dr. Isidore S. Falk at the University of Chicago in 1926. Falk was primary author of an influential 1932 health care report accused of promoting socialized medicine.   Photo: Chicago Tribune archives

In April 1932, a committee of doctors, economists, and accountants was holed up in the Palmer House to finish work on an epic first: a study five years in the making, costing $750,000 to $1 million ($13 to $17 million in today’s dollars), covering 9,000 families over the course of a year, on the cost of health care in America.

The committee that produced the report was chaired by Dr. Ray Lyman Wilbur, a past president of the American Medical Association, president of Stanford University, friend of Herbert Hoover, and future critic of the New Deal. One of its main fiscal experts was C. Rufus Rorem, an assistant professor of accounting at the University of Chicago, whose work on the committee would become crucial to the creation of modern health-insurance plans. Its associate research director and primary author was Isidore S. Falk, a UChicago bacteriologist who would subsequently move on to head the Social Security Administration’s Office of Research and Statistics.

In short, the committee, formed in 1927, was headed towards the great cleft between Hoover and the New Deal, and the two most powerful men on the committee would end up on opposite sides, with Rorem’s work charting something like a middle path. Scheduled to drop on the evening of April 12, the committee voted to reject the report, sending it back to Falk “to be completely revised,” the Tribune reported. The revision would take yet another seven months, and mostly punted on the key decision of its time: public or private health care? But the largely forgotten document, even in its failures, quietly shaped the industry that Congress is now desperately trying to revise.

It also put hard numbers on American health-care spending for the first time, just before the modern administrative state began to grow and as medical specialization was expanding. The figures were modest by contemporary standards: the average family spent $1,700 (in 2017 dollars) on health care, compared to $10,345 last year. It accounted for four percent of gross domestic product, the same as Equatorial Guinea and Cameroon in 2014; today the United States spends 17 percent of its GDP on health care, well above the highest-spending OECD country, Sweden, at 11 percent.

But that low percentage of GDP was due in part to massive inequities:

Despite much charity care by physicians, hospitals, and health departments, in the lowest-income groups about half received no medical care at all. It was estimated that if medical care was organized economically, all the usual needed care for the entire country could be provided for $20 to $40 [in 1929 dollars] per person per year (excluding capital costs). The most quoted statement from the report indicated the basic problem in medical care was “not the system, but the lack of a system” to organize care.

Twenty to $40 per person per year is the equivalent of $280 to $570 in 2017 dollars, at a time when a middle-class family income was the equivalent of around $55,000, and a working-class family income around $38,000, prior to the Great Depression.

One of the committee’s more interesting findings was that, for families making $5,000 a year or less ($71,000 in 2017 dollars), medical spending didn’t vary much by the size of the family: “For all the income groups except those with $5,000 and more, there was, in general, less than 10 per cent variation between the average expenditures for families containing only one or two persons and for those having eight or more in the family.” They concluded that, from the poor to the middle class, families simply had a certain amount they could pay in medical expenses, regardless of how many children they had.

The study also found that the number of recorded illnesses increased with income: 805 per 1,000 people in families making between $1,200 and $2,000; 880 from $3,000 to $5,000; and 1,111 per 1,000 people in families making more than $10,000 a year (over $142,000 in 2017 dollars). The cost of services between income groups was even more skewed.

In families with incomes of $1,200 to $2,000, 43 per cent of the persons receive no medical care in a typical year, another 5 per cent are cared for entirely free of charge, and 30 per cent incur bills of $10 or less. For persons in families with incomes of $10,000 or more, only 14 per cent receive no medical care, 0.3 per cent receive only free care, and only 12.4 per cent incur bills of less than $10 in the course of the year.

Furthermore, the average expense for a hospitalized illness for families making $1,200 to $2,000 was $103; for families making more than $10,000, it was $470. Not only was affordability a problem, the gap suggested working-class families were not getting nearly as much care. (These numbers are actually similar to the current market—the lowest quintile of American households by income spends about a quarter as much on health care as the highest quintile.) Unless the poor and working class were les sick than the wealthy, something else was at work.

“The receipt of medical care goes hand in hand with the recognition of its need,” the authors wrote, “but recognition of need is correlated with economic level and is lower for the poor than the rich.”

They addressed plenty of issues that still resonate.

Many families of moderate income who are unable to pay for their medical care in time of sickness are frequently criticized for the fact that they spend relatively large amount for articles which may be considered luxuries; but families of the same income who deny themselves such luxuries find it just as difficult to plan ahead for the costs of illness. The amount of money which these families can save is usually inadequate for any unexpected and expensive medical needs.

Sound familiar?

In order to address this problem, the committee laid out just two possibilities: private insurance and public taxation. Their description of the first option should also sound familiar (emphasis mine).

Participation of commercial companies in sickness insurance has two inherent disadvantages: under their administration the costs of medical care are apt to be increased and the quality of care may decline. When patients and practitioners deal with a representative of an impersonal, intermediary business agency, they have little incentive to prevent malingering, to reduce costs, or to render care of high quality, for all financial responsibility is shifted to the insurance company. When, however, homogeneous groups of insured persons contribute to a common fund jointly administered to meet the costs of medical care, the group as a whole benefits from measures which promote efficiency, economy, and high quality of service. Medical and dental practitioners also find it advantageous to deal directly with patients or their elected representatives, rather than with a commercial intermediary. Group sickness insurance when subject to group supervision and cooperation and safeguarded by community legislation seems to offer advantages as a means of providing protection against the costs of illness.

It’s not quite socialized medicine, but you can see it from there.

When the committee did take up taxation, they began by detailing the areas where the state currently paid for health care: mental illness and tuberculosis ($185 million of an estimated $304 million in government-hospital expenses in 1930), the military, prisons, wards of the state, and for those who couldn’t pay full cost.

And they extended that a bit further:

Taxation as a means of meeting the cost of medical care is also peculiarly applicable when there is wide divergence in the financial resources of different localities. Medical needs arise, roughly speaking, in proportion to the size of the population, whereas the ability to pay for medical care is in proportion to financial resources…. If the provision of medical care is to be extended to accord more nearly with the people’s need than is now the practice, and if the costs are to be met, a broader use of tax funds seems inevitable…. The principle of distributing the costs of medical care through one form or another of group payment should be so applied as to cover the full costs of the services received by the major economic and geographical groups and should provide, so far as possible, that persons shall contribute within their means for the services which they receive. 

But they pulled up short; the summary of their recommendations for how Americans should pay for health care was “the costs of medical care should be distributed over groups of people and over periods of time.”

Still, they left the door open for a greatly expanded role of the government in paying for health care; the New York Times headlined its story on the report “Socialized Medicine Is Urged in Survey,” and at a session concluding the conference that the report was finally presented at, the president of Yale University “urged that nothing be done… to frighten the public by radical-sounding phrases.” The president of the New York Academy of Medicine “cautioned that nothing be done to destroy the relation between the private doctor and the patient who is able to avoid treatment… to place too great a tax burden upon self-supporting persons or to permit political interference with medical and hospital service.”

The blowback was swift, beginning within the committee itself (emphasis mine):

Notable was the fact that eight physicians dissented and wrote a minority report. They supported continued experimentation with such models and new proposals but strongly felt that the independent practicing physician should be in charge of any programs or changes. They objected to competition based on price as “unprofessional.” This group felt that even voluntary health insurance would lead to a compulsory national health insurance, as was in place in many European countries.

The Chicago-based Journal of the American Medical Association, though, made the most aggressive stand against the Committee’s work in an editorial by Dr. Morris Fishbein, its editor from 1924 through 1949. The University of Chicago and Rush Medical College graduate was an able media figure, writing and speaking at an unfathomable rate and eventually landing on the cover of Time in 1937 as “the nation’s most ubiquitous, most widely maligned, and perhaps most influential medico.” He could be hostile in wielding his power; the health-policy expert Jonathan Engel describes him as “thuggish” and his temperament would eventually lead to his ouster from the AMA.

Fishbein’s response to the Committee was downright nasty, beginning with a crude attack on the length and expense of the study:

So definite was the trend of the committee’s studies in this direction [towards group insurance and government involvement] that one must view the expenditure of almost a million dollars by the committee with mingled amusement and regret. A colored boy spent a dollar taking twenty rides on the merry-go-round. When he got off, his old mammy said: “Boy, you spent yo’ money but where you been?”

That’s from the first paragraph; he goes on to call its report “incitement to revolution,” “socialist,” and "communist,” and the group health insurance plans as “medical soviets,” even going in on existing government coverage for war veterans: “Who today fails to realize the menace inherent in the Veterans Bureau?”

With that, writes health-administration expert and HMO veteran Irwin Miller, Fishbein “effectively killed” the CCMC report. The health-policy researchers W. Michael Bird and Linda Clayton write that “this explosive rhetoric completely ruptured most illusions of cooperation that had previously existed between the reformer and medical society factions for the previous two decades.”

The AMA continued to vociferously oppose forms of national health insurance even after Fishbein’s ouster, including Medicaid and Medicare, though in 1961 it did ”admit that the criticism of [Ray Lyman] Wilbur had been false.”

The committee went its separate ways. Wilbur continued his duties as the president of Stanford. Isidore Falk moved to the New Deal Committee on Economic Security, then the Social Security Board, and finally the Social Security Administration, where he served under Franklin Roosevelt and Harry Truman, though he couldn’t escape the AMA—its lobbying forced Roosevelt to pull a health-insurance provision from the Social Security Act. After leaving the federal government, Falk consulted with countries on safety-net programs, and was able to implement some of the CCMC’s ideas on a small scale with the Community Health Care Center Plan in New Haven, Connecticut, an early, community-based HMO.

C. Rufus Rorem had come to the CCMC with virtually no knowledge of health care or hospitals; he was brought on to the committee by the director of medical services for the Chicago-based Julius Rosenwald Fund because it needed someone with expertise in accounting and social statistics. “After a few weeks,” Rorem later said, “I found that instead of asking questions I was answering questions. This was a field in which I knew very little, but in which the hospital representatives knew nothing. Within a month I became an expert on capital investments in hospitals and began writing on the subject. There was no literature. If I wanted to read something about capital investment, I had to write it myself.”

Despite his brief education, Rorem would end up doing more than either Falk or Wilbur to shape the American health care system. He consulted for and soon became associate director of the American Hospital Association, going to work on the creation and expansion of prepaid hospital plans.

Around the time the CCMC was doing its work, the hospital at Baylor University allowed Dallas school teachers to pay 50 cents a month in order to receive 21 days of inpatient care. Within months, 75 percent of the teachers were on the “Baylor Plan,” and it expanded to cover 23,000 people from different groups in its first five years. The AHA jumped on the bandwagon, and Rorem crafted the first “Blue Cross” plans, nonprofits which expanded the Baylor concept beyond individual hospitals and into “all hospitals of standing within the community” to preclude competition between them. Employers were a natural source of groups within communities; even before employers started contributing to premiums, payroll deductions smoothed the transition to group care. By the end of the 1930s, six million people were in Blue Cross plans; by 1945, 19 million.

Rorem, though, would continue to be haunted by the attacks on the committee that gave him his start. “It seems that Rorem never shook the reputation he acquired from having worked for the CCMC,” writes historian Paul V. Dutton. “Growing suspicions that Rorem viewed Blue Cross as a successful experiment in health security but also believed that government intervention would ultimately be necessary to sustain its growth led [Cleveland Hospital Association leader John] McNamara to accuse Rorem of being a Communist and to call an emergency meeting of Blue Cross directors to consider the charges. Rorem survived the inquisition but resigned shortly thereafter at the age of fifty, seemingly at the height of his career.”

Twenty-six years after his red-baiting at the hands of his colleagues and three years before his death in 1988, Blue Cross and Blue Shield established the C. Rufus Rorem Health Service Award. His ideas, the legacy of the CCMC, and the ideology of their opposition live on, still fighting it out—and judging by the events of this week, it hasn’t gotten any easier.

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