How Government Solved the Health Care Crisis - Animation

Today, the United States faces a health care crisis. Medical costs are too high, and health insurance is out of reach for the poor. The cure is obvious to nearly everybody: government must step in to solve the problem.

Eighty years ago, Americans were also told that their nation was facing a health care crisis. Back then, the complaint was that medical costs were too low, and that health insurance was too accessible. But in that era, too, government stepped forward to solve the problem. And boy, did they solve it!

In the late 19th and early 20th centuries, one of the primary sources of health care and health insurance for the working poor in Britain, Australia, and the United States, was the fraternal society. Fraternal societies (or "friendly societies" in Britain and Australia) were voluntary mutual-aid associations. Over one-quarter of all American adults were members of fraternal societies in 1920. Fraternal societies were particularly popular among blacks and immigrants.

A fraternal society was a group of working-class people who formed an association and paid monthly fees into the association's fund; individual members would then be able to draw on the pooled resources in times of need. There were a great many societies to choose from. Their most commonly offered services were life insurance, disability insurance, and lodge practice. Lodge practice meant that the lodge would retain a doctor to provide medical care to its members.

Members would pay a yearly fee and then call on the doctor's services as needed. If members were unhappy with the doctor, the contract might not be renewed. Most remarkable was the low cost at which these medical services were provided. At the turn of the century, an average worker’s daily wage would pay for a year's worth of medical care, much cheaper than on the regular market.

Yet licensed physicians competed vigorously for lodge contracts, perhaps because of the security they offered. This competition kept members’ costs low. The response of the medical establishment, both in America and in Britain, was one of outrage; many saw it as a blow to the dignity of the profession that trained physicians should be eagerly bidding for the chance to serve lower-class tradesmen.

Such low fees, many doctors complained, were bankrupting the medical profession. Socially inferior people were setting physicians' fees and sitting in judgment to determine whether their services had been satisfactory! They demanded that the government must do something. And so it did.

In Britain, state-financed medical care crowded out lodge practice; a working-class person, now being forced to pay taxes for "free" health care, was very unlikely to also pay for health care through the fraternal societies. In America, a similar process unfolded. Medical associations like the AMA had been granted the political privilege of control over the medical licensure procedure.

The associations used this power to impose sanctions on doctors who dared to sign lodge practice contracts. Doctors could be denied the use of hospital facilities or expelled from the association. The effort to destroy lodge practice even extended to denying emergency medical care to lodge members.

The AMA also made the requirements for getting a medical license much stricter, ostensibly to raise the quality of medical care. But the result was that the vast pool of physicians bidding for lodge practice contracts disappeared. This artificial restriction on the supply of medical care dramatically reduced competition, which resulted in higher prices. This hit the working-class lodge members especially hard.

The final blow to lodge practice was struck by the fraternal societies themselves. The National Fraternal Congress successfully lobbied government for laws setting a legal minimum on membership fees that fraternal societies could charge. Perhaps the congress did so hoping to benefit from cartel pricing, but thanks to the higher membership fees, the societies ended up losing even more members to industrial insurance firms and the welfare state, which eventually replaced them.

Collectively, government interventions destroyed the mutual aid health care system and with it, the availability of low-cost healthcare to the working poor. We can only guess at how lodge practice would have developed if it had been allowed to continue, and what innovations we’ve missed out on since competition in the medical world was hobbled.

One thing does seem clear: we have a crisis in health care costs today because government ‘solved’ the last one.