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Healthcare podcast covering hospital systems, medical education, physician employment, healthcare policy, and the future of academic medicine. Exploring corporate healthcare, nonprofit hospital governance, medical school funding, and patient care quality. Real cases, expert analysis, systemic change.
Welcome back to The Deep Dive.
Today, we are wading into some pretty deep and turbulent waters.
We're talking about American health care.
And we know what that means for you, the listener.
It's the rising premiums.
It's that fight with your insurance company over a prior authorization.
Yeah, that constant anxiety that you might lose your coverage if you switch jobs.
And you look at this whole system and it's so, I mean, it's so bizarrely complex, you have to assume it planned.
Right.
Either by geniuses or, you know, maybe by villains.
Exactly.
But our sources today , they offer a much more fascinating and frankly, a much more terrifying explanation.
They do.
They describe the system not as some sleek, well-oiled machine, but more like a Frankenstein's monster.
Or I like this one, a car designed by a committee over 100 years, you know, where the steering wheel, that's your health insurance, was bolted on during a World War II labor shortage.
And the brake pedal, that was installed because hospitals were going completely broke back in 1929.
And the whole engine, the thing that makes it all run, it runs on a special fuel that just happened to become tax deductible because of an accidental IRS ruling in the 50s.
It's the perfect example of what historians call path dependence.ence, and the core idea here is absolutely critical for you to understand .
This system, it isn't some grand conspiracy.
Wow.
It is the accumulated debris of a century of perfectly rational people making what they thought were perfectly rational decisions to solve an immediate problem right in front of them.
Every single decision made sense at the time.
It did.
Every policy, every new rule, it solved a crisis in that moment .
But because nobody ever really stepped back to look at the whole messy picture, we're left with this system that's so intricate, so costly, I mean, we're talking over four and a5 trillion dollars a year.
Exactly.
A system that just defies any simple logic.
So our mission today is to pullbart those layers of debris.
We're going to trace that historical path in pinpoint the exact moments, the key accidents that locked us into the system we have today.
We want you to understand exactly why prior authorization is a thing, why your deductible feels so punishingly high, and why your job is so deeply tied to your family's medical security.
By the end of this deep dive, your own frustrations with the system will feel , well, less random and a lot more historically determined.
Let's get into it.
To really get our heads around how much has changed, we have to start in a world that is just completely unrecognizable to it. Today, let's say, before the Great Depression, pre--1929.
Right.
And that time was really defined by two things, a very, very simple payment system and a terrifyingly limited state of meth.
When medicine couldn't do that much, paying for it was easy.
That's it, exactly.
This was the era of what you could call the house call economy.
If you got sick, you didn't, you know, drive to an urgent care clinic.
You sent someone to go get the doctor.
He'd show up at your house, usually on horseback or maybe in a buggy, do a physical exam.
And that was pretty much it.
And the payment system reflected that simplicity.
It was direct.
It was personal.
And highly informal.
Our sources point out that a lot of the time cash didn't even change hands .
If you were a farmer, you might pay with a chicken.
A chicken, really?
A chicken, a basket of vegetables, or maybe just a promise to pay up when the harvest came in.
It was all based on a personal relationship.
Which leads to this fascinating point about ethics back then.
Price discrimination wasn't just common, it was expected.
It was considered the ethical thing to do .
The doctor was a small businessman, so he'd charged his wealthy patients more.
To cross-sidize the poor.
Oh, exactly.
To cover the care for the people who could't pay at all, it was all based on this local community judgment.
Iefficient by our standards, sure, but in its own way, very humane.
What really gets me, though, is the total absence of administration.
The sheer amount of paperwork and bureaucracy we deal with today, just didn't exist.
Not at all.
No insurance companies, no billing departments, and this is crucial.
No complex coding.
Okay, let's define that, because that's where so much of the modern complexity comes from.
What do we mean by coding?
Well, today , a doctor has to translate every single thing they do into a bureauaucratic language.
There's ICD10, the code for every diagnosis you can imagine from the flu to, you know, a paper cut.
Right.
And then there's CPT codes for every single procedure ing back then.
The doctor in, treated fever, two That was the entire administrative record.
But that simplicity, as you said, it came at a huge cost.
The medicine itself was just, it was terrifyingly ineffective.
That's the trade-off.
Penicillin wasn't widely available until the 1940s.
So a simple infection, a cut from working on the farm, that could easily kill you.
And things like CT scans or MRIs or science fiction, Diagnostics were basically the doctor's physical exam and his best educated guess.
Right.
And surgery was an absolute last resort.
Anesthesia was primitive.
They didn't have blood transfusion, so mortality rates were brutally high.
The best medical advice was often just to rest and press..
So what about hospitals?
They weren't these centers of high tech medicine we think of today.
No, not at all.
If you were wealthy and sick, you stayed home.
Hospitals were mostly for the poor, the homeless.
They had these grim nicknames likedeath houses.
And their funding was incredibly precarious.
Our sources call it the three legged stool.
Leg one was the few paying patients they had who were charged on that sliding scale.
Leg two was philanthropy, big donations from the rich, but also free labor from, say, nuns who worked as nurses..
And the third leg.
Government subsidies.
Cities and counties would pay a little bit for the care of the poor.
So the whole system sort of worked, but just barely?
It worked because it was cheap.
A house call for two bucks is maybe $30, $40 today .
A week in the hospital might be 50 bucks or around $750 now.
It was a lot of money, but not financially catastrophic.
The unspoken bargain was that medicine is cheap because it's mostly ineffective.
Exactly.
But that fragile bargain was about to be completely shattered.
Which brings us to accident number one , the Great Depression.
Right.
October, 1929, the stock market crashes, and it's not just a financial crisis.
It's a shock that instantly wipes out the entire health care infrastructure.
That three-leggged stool didn't just wobble.
It completely collapsed all three legs all at once.
So leg one, patient revenue with unemployment hitting 25%, that just vanished.
Gone.
Leg two philanthropy.
Well, the philanthropist had just lost their fortunes.
That was gone, too.
In leg three, government subsidies disappeared as tax revenues plunged.
But here's the paradox, just as all the money disappears , the demand for free, charitable care explodes.
Because everyone is suddenly poor and sick.
Precisely.
So the hospitals are trapped.
Massive demand, zero revenue.
They were facing immediate bankruptcy.
This is where desperation leads to invention.
It leads us directly to what's called the Baylor Miracle, also in 1929.
You have this administrator at Baylor University Hospital in Dallas, Justin Ford Kimball.
And he's not trying to reform health care for the nation.
No, he's just trying to make payroll.
He needs predictable cash flow to keep the lights on.
And he looks at the Dallas School teachers.
A group with steady, if small, paychecks .
And he offers them a deal that is, in retrospect, absolutely brilliant.
It was a survival tactic.
The deal was, the teachers pay Bayer $50 cents a month.
Just 50 cents!
The cost of a few coffees back then?
And in return, they get up to 21 days of hospital care a year if they need it.
And that is the birth of modern health insurance.
It's the simple genius of risk pulling.
The hospital gets guaranteedeed cash every single month.
Right.
Most teachers won't get sick , but their 50 cents pays for the few who do.
It was a contract between a group of consumers and a single provider.
It wasn't really insurance yet.
It was a prepayment plan.
And this model, born out of desperation, it just takes off.
It spreads like wildfire because every hospital was in the same desperate situation.
And by the mid 1930s, the American Hospital Association steps in to standardize all these little plans.
And that's how we get Blue Cross.
That's Blue Cross, born in 1933, and it was builted on a few key principles.
First, it was nonprofit.
Sec, it covered hospital services only.
Why only hospitals?
To avoid a fight with the doctors, the American Medical Association, the AMA, was incredibly powerful , and they saw any organization that contracted with doctors as a threat to their autonomy.
So they stayed off the doctor's turf.
And the third principle was the most important.
Community rating.
This is a really crucial concept.
It meant that everyone in a certain area paid roughly the same premium, no matter if you were old, young, sick, or healthy.
It's a principle of social solidarity, spreading the risk across the entire community.
Exactly.
But the doctors eventually wanted in on the action, so they created their own version in 1939.
Blue Shield.
Blue Shield .
But its structure was very different, and it was all about protecting the doctor's independence.
Initially, it paid on what's called an indemnity basis.
PD, it paid the patient, not the doctor.
Right.
The plan would pay you, the patient, a fixed amount of cash for a procedure, say, $100 , and then you were responsible for paying the doctor whatever he charged.
So the doctor never had to negotiate fees with the insurer.
They kept their autonomy.
But once the bluesues proved that, hey, you can actually make money covering health risks, the big commercial insurance companies.
They smelled money.
They smelled a lot of money .
The life and casualty insurers jump in, but with a total different, purely businessvenilosophy.
They used something called experience rating.
And this is where that idea of community solidarity starts to fall apart.
It completely unravels.
Instead of charging everyone the same rate, a commercial insurer would look at a specific group like a factory full of young , healthy men, and offer them a premium based on their low risk.
They could undercut Blue Cross's prices.
Massively.
They could cherry pick all the healthy, cheap groups, leaving Blue Cross with a sicker, older, more expensive pool of people.
It was a death spiral for community rating.
So in less than 20 years , the whole payment system is transformed from a chicken and a handshake to a formal third party system.
And it happened for one reason and one reason only.
Hospitals were going broken needed cash.
That was accident number one.
But that just set the stage for the big one, the accident that would define the entire system we have today.
If the Depression invented insurance, World War II put it on steroids and permanently chained it to your job .
This is accident number two.
The story starts in 1942 with the wage freeze.
It's the middle of the war.
There's a huge labor shortage, and the government is terrified of inflation.
So the National War Labor Board steps in and imposes strict wage and price controls .
You literally could not offer higher wages to attract workers.
But they left a loophole.
A huge and seemingly minor loophole.
They ruled that fringe benefits, and this included health insurance, were not technically wages and therefore weren't subject to the freeze.
So employers suddenly had a new, powerful tool to compete for workers.
Exactly.
And unions jumped on it, too.
They started pushing for better health benefits instead of wage hikes they couldn't get .
It Bec became an expected part of the job.
But the real clincher, the thing that locked it all in, wasn't from the war labor Board.
It was an IRS ruling.
The Invisible Tax subsidy.
This is the economic engine of the entire system.
The IRS ruled that the money an employer spent on your health insurance premiums was not considered taxable income for you , the employee.
Okay, let's stop and do the math here, because this is so important for you to understand.
It's everything.
Let's say your total compensation is worth $10,000.
If your boss gives you that as a cash raise, you pay taxes on it, income tax, Social Security .
You might only take home $7,500.
But if your employer uses that same $10,000 to buy a health plan for you.
You get the full $10,000 of value, completely tax free.
A dollar of health benefits became worth much more than a dollar of wages.
And this wasn't some grand piece of legislation.
It was an administrative ruling that just got baked into the system.
It was eventually codified into law in the 1954 Internal Revenue Code, but it started as an accident , and it became this massive hidden subsidy for getting your insurance through your job.
And this one accidental decision had three enormous system defining consequences.
The first one is obvious. Employment lock in.
Insurance is now tied to your job.
That's the only place you can get this huge tax place.
If you lose your job, you don't just lose your paycheck.
You lose your family's heavily subsidized health coverage.
Exactly.
And it creates this huge pressure to stay in a job you might hate just for the benefits.
Okay, consequence number two.
The incentive for what you might call gold plated plans.
Because the benefit was tax-free, there was no reason to be frugal.
Workers and unions pushed for plans with low deductibles that covered everything.
Even routine predictable stuff.
Right.
Checkups, eyeglasses, prescriptions.
It completely removed any sense of cost from the equation for the patient .
It's like having car insurance that pays for your oil changes and new tires.
It guarantees price inflation over time.
Chronic. High inflation.
And the third consequence was political lock in.
By the 1960s, a huge majority of working Americans had this coverage.
Almost 70% of the non elderly, and they became this incredibly powerful constituency that resisted any kind of reform that might threaten their tax advantages employer plan.
It became politically untouchable.
It still is.
The irony is just crushing.
Nobody ever sat down and said, hey, the best way to structure a health care system is to tie it to employment.
It just happened because of a war, a labor shortage, and a tax loophole.
So by the 1960s, this accidental system is in place, but it's got these huge glaring holes in it.
Massive holes, it completely fell failed two huge groups of people, the elderly and the poor.
The elderly were retired, so they weren't connected to the employer system, and they were high risk.
So private insurers either charged them a fortune or just wouldn't cover them at all.
It was a classic market failure, and the poor, working low wage jobs, they just didn't get benefits.
The old charity system couldn't handle the scale of the problem anymore.
This creates enormous political pressure, which leads to the landmark legislation of 1965.
But the solution wasn't to tear down the private system the middle class now relied on .
The solution was to build on top of it.
This is is the famous 1965 compromise, what they call the three layer cake.
Layer one was Medicare Part A. This was hospital insurance for everyone over 65.
It was mandatory, funded by a payroll tax on workers.
So it looked a lot like Blue Cross.
Very much so.
Lair two was Medicare Part B. This covered doctor's visits and outpatient care .
It was voluntary and it was funded by a mix of general tax revenue and premiums paid by the seniors themselves.
Like the old Blue Shield model.
Exactly.
And layer 3 was Medicaid.
This was for low income people, and it was set up as a federal state partners.hip.
Which means the rules and who's eligible can be wildly different depending on what state you live in.
A huge source of variation to this day.
Now, this was a massive expansion of coverage, a huge success , but to get it passed, they had to be a deal with the providers.
And that deal created the system's fatal flaw?
Yes.
To overcome decades of opposition from the AMA and the hospital lobby, the architects of Medicare offered them incredibly generous payment terms.
It was essentially a blank check.
Let's start with the hospitals.
How did Medicare pay them?
On a reasonable cost basis, it was cost plus reimbursement.
The hospital would literally just add up all its costs at the end of the year, send the bill to Medicare, and Medicare would pay it plus a little extra.
Let's just sit with that incentive for a second.
If you spend more, you get reimbursed more.
There was zero incentive for efficiency.
The incentive was to buy the newest, most expensive scanner, build a new wing on the hospital , hire more staff, because it was all guaranteedeed revenue from the government.
And what about for doctors?
For physicians, it was reasonable charge reimbursement.
They were paid based on whatever the usual and customary fee was in their local area, reinforcing the fee for service model.
Paid for volume, not value.
The more tests you order, the more procedures you do, the more money you make.
The incentive was to do more , always do more.
And this fire hose of government money created what you call the Golden Age for academic medical centers.
Oh, it was a bonanza for them.
These big university hospitals are naturally expensive, they do research, they train new doctors..
Under cost-based reimbursement, all of that was covered.
And Medicare even added extra payments just for being a teaching hospital.
Yes, direct payments for resident salaries and indirect payments just to offset the supposed higher costs of having a teaching mission.
So for these AMCs, the '60s and '70s were a massive boon time.
A huge construction boom, a rapid race to adopt every new piece of technology .
This system was just screaming at them to spend more money.
And the result was predictable.
A cost explosion.
By the early 1970s, Medicare spending was just blowing past projection.
Healthcare inflation became a national crisis.
But direct government price controls were politically impossible.
Completely off the table.
So policymakers had to find another way, some kind of market based solution to get costs under control.
And that led them to dust off a model that had been around for a while, but was always seen as too radical.
It led them to Dr. Paul Elwood Jr. And his work studying prepaid group practices like Kaiser Permanente.
They seemed to work, but they had a huge PR problem.
They sounded like socialized medicine .
Exactly.
The AMA had demonized them for decades.
So Elwood's genius was rebranding.
In 1970, he coined a new business this friendly term, the Health Maintenance Organization.
The HMO.
It sounds efficient.
It sounds like it's about prevention.
It was a marketing master stroke, and the core idea of the HMO was to take that fatal flaw of Medicare fee for service and completely flip the incentive.
Instead of paying for volume.
You paid a fixed preaid amount per person, a capitation payment .
The plan or the doctor gets a set amount of money per member per month, whether that person sees them once or hundred times.
Though, now the financial risk is on the provider.
If they provide a ton of expensive care, they lose money.
But if they can keep you healthy and avoid unnecessary care, they get to keep the profit.
The incentive flips from doing more to doing less.
This idea appealed to the Nixon administration.
It did, and it led to the HMO Act of 1973, which threw federal support behind the model, giving it legitimacy and market access.
But the way HMO's achieved those savings created to ton of friction.
A massive backlash.
They were essentially gated communities for healthcare.
First, you had the restricted network.
You had to use their doctor's, period.
Then you had the gatekeeper.
Your primary care doctor controlled all your access to specialists and expensive tests.
And finally, the tool that is still very much with us today , utilization management.
Prior authorization.
Pre-off-forgeries, MRIs.
Constant reviews to get people out of the hospital faster.
It was aggressive administrative.
And while the incentives sort of work to control costs, L would completely underestimated the public's reaction.
People hated the loss of choice .
Doctors hated being second guest and you got these horror stories in the media.
The drive-by deliveries.
Right, where HMOs were pushing new mothers out of the hospital in 24 hours to save money.
It created this huge political firestorm and a powerful anti-HMO backlash that still exists.
So by the 1980s, you have this dilemma, Costs are still rising , but people flat out reject the HMO model.
Employers want savings, but employees want choice.
They needed a compromise.
And that compromise, invented around 1980, was the PPO, the preferred provider organization.
It was a simple, brilliant solution .
The goal wasn't to lock you in a network, but to financially steer you.
So the insurer goes out and negotiates discounted rates with a network of preferred doctors and hospitals.
And the deal for you, the patient, is that you can go out of network if you want, but it's going to cost you a lot.
Right.
If you stay in network, it's a simple $50 copay.
If you go out of network, you've got a huge deductible , and you're paying maybe half the bill yourself.
Exactly.
It created the illusion of choice, which people loved, while still delivering some cost savings to the employer.
PPOs took over the market almost overnight.
But they introduced a new dynamic into the market, something called selective conting.
And this was a seismic shift in power.
The first time, insurers had real leverage.
What does that mean, leverage?
It means the insurance company could go to a hospital and say, look, accept our 20% discount we will cut you out of our network and send our hundreds of thousands of members to your competitor down the street.
For a hospital, being kicked out of a major PPO network could be a death sentence.
It put the them under real financial pressure for the first time ever , but it also led to a huge and ultimately system defining, unintended consequence.
Provider consolidation.
Exactly.
The hospitals and doctor groups realized that their only defense against the power of the PPO was to get bigger themselves.
So independent hospitals started merging into huge regional health systems.
Small doctor practices were bought up.
It was a race for scale because if you become the one dominant hospital system in your region, you can turn the tables on the insurer.
You can go back to the PPO and say, hey, you can't sell a network in the city without us.
We have the only trauma center, the only cancer Institute, our rates are non-negotiable.
And by the way, we want a 10% increase next year.
So the very tool. Designed to increase competition and lower prices triggered a wave of consolidation that reduced competition and ultimately drove prices right back up.
It's the ultimate irony of this accidental system.
And that consolidation arms race brings us pretty much to the system we live in today.
Right.
After that backlash against the aggressive HMOs in the 90s , insurers had to retreat a bit.
Networks got w.ider, gatekeeping relaxed.
But costs started climbing again, so they didn't give up on controlling costs.
They just changed their tactics.
They shifted from controlling the network as a whole to controlling individual services.
And that is what we now all know and love as prior authorization hell.
Precisely.
If the plan can't tell you which doctor to see, they can still make that doctor jump through a thousand administrative hoops to prove a specific MRI or a specific drug is medically necessary.
It's a war of attrition fought with paperwork and fax machines.
Think about the waste.
The doctor's office has to hire extra staff just to fight with insurance companies all day to get care approved for their patients .
It's a huge, expensive bureaucracy layered on top of actually providing medicine.
And if that wasn't confusing enough, there's another act accident that makes the rules of the game totally inconsistent.
Accident number three, Arissa.
This wasn't even a health law.
It was the Employee Retirement Income Security Act of 1974.
It was designed to protect people's pensions.
But it accidentally got applied to health benefits, too.
And it had a bombshell provision .
It said that large employers who self- insure their health plans are subject to federal law, not state law.
Okay, let's break that down.
What does self-insure mean?
It means the company isn't buying an insurance policy.
They're just paying their employees medical bills directly out of their own bank account .
They hire an insurer like Ana or Blue Cross just to process the paperwork.
And most large companies do this?
About 60% of all covered workers are in these self-insured plans.
And because of IRISA, these plans are exempt from all state-le insurance laws.
So you have two different regulatory worlds.
Exactly.
You have the fully insured world of small businesses and individuals, which is heavily regulated by the states.
And then you have the self- insured Arerissa world for big companies with much weaker federal oversight.
Which means your rights in protections as a patient can be completely different depending on the size of the company you work for.
It's a fragmented regulatory mess, all because of an accidental side effect of a pension law from the '70s.
So let's circle back to those academic medical centers, the AMCs.
Their golden age of cost plus payment came to a screeching halt.
A very violent end.
They got hit with what we call the triple squeeze, starting in the 80s that almost bankrupted them.
Squeeze number one came from Medicare itself.
In 1983, Medicare stopped paying based on cost and switched to a system of fixed payments called diagnosis related groups , orDRGs.
So now the hospital gets one flat fee for a heart attack patient, no matter how much they actually spend.
Right.
All of a sudden, the incentive flipped.
Now they need it to be efficient to get patientsients out the door faster.
And for highs, that was a huge financial shock.
Was squeeze number two?
The managed Care Squeeze .
PPOs grew, they started steering their members to cheaper community hospit for all the profitable routine stuff like knee replacements.
So the AMCs lost their most profitable patients.
They lost the cases that had always subsidized their expensive research and prom emissions.
They were left with the sickest, most complex, and least profitable patients.
Their whole financial model collapsed.
And the third squeeze was a worsening pair mix.
More low paying medicicare and Medicaid patients, fewer, high paying commercial patients.
It was a perfect storm.
And their attempts to adapt in the 90s were not successful.
They were strategic disasterss.
They went on these massive primary care buying sprees, thinking they could control patient referrals.
They paid way too much for practices that lost money.
And they tried these huge mergers that blew up.
Like the UCSF Stanford merger, a culture clash that cost them hundreds of millions and was unwound in just a few years.
They were just flailing.
So how did they survive?
The ones that survived learned some brutal lessons.
They stopped being single hospitals and became huge integrated health systems .
They started buying up all those community hospitals and outpatient clinics.
To regain that market leverage against the insurers.
And, to keep those profitable routine cases inside their own system, they also implemented just brutal operational discipline.
They had to start acting like lean, mean businesses, not cushy ivory towers.
So the AMCs we see today are a completely different animal.
They are.
They're lean, more financially focused, and are constantly playing this high-stakes market game to position themselves as the must-hproider that no insurance network can afford to exclude.
Which brings us to the end of this journey .
We've traced this long, strange, accidental path.
And the central tragedy, the thing we keep coming back to is that while every single step along the way was a rational decision in isolation..
The result is a system that is completely irrational in its totality.
Every player is just doing what makes sense for them.
The insurer uses prior off.
The hospital consolidates for leverage.
The employer wants the tax break.
But when you add it all up, you get the most expensive system in the world , with middling outcomcomes and a ton of administrative friction.
You are living inside the fossil record of these accidents.
Every time you get a confusing bill or an explanation of benefits, you're looking at the ghost of a political compromer made decades ago.
When you worry about losing your health insurance if you change jobs.
You are feeling the direct legacy of World War II wage controls.
When your doctor's office is stuck on the phone for an hour, fighting for a pre off...
That's the hangover from the managed care backlash of the 1990s.
And when that giant hospital system demands a huge rate increase...
That's the direct result of the consolidation that PPOs accidentally triggered 40 years ago.
It just shows the incredible power of path dependence.
Once those first few accidental turns were made , the whole system got locked in.
And that's why real reform is so hard.
It's not just about politics, it's about trillions of dollars and the entrenched interests of everyone who depends on that money flow.
You can't just easily untangle it.
No.
We're living in the system that history built for us, not the one anyone would design from scratch .
It's a patchwork of temporary fixes.
It's the tragedy of the accidental architecture, and that leaves us with one final providerocative thought for you to take away.
If the whole idea of health insurance started in 1929, simply because a hospital administrator needed to keep the lights on , if it was never designed to cover routine care in the first place.
Then what is the real purpose of health insurance in the 21st century?
Is it just for patastrophic protection?
Is it a tool for cost control?
Or is it for comprehensive health maintenance?
And the real question is, can one vehicle, born of 100 years of accidents, possibly do all three of those things effectively?
That's the tension at the very heart of the system you live in.
Thank you for joining us on this deep dive.'ll see you next time.