The modern American health insurance system didn’t emerge because someone designed it thoughtfully, and it shows. It evolved from a series of political, economic, and cultural accidents beginning largely around the period of World War II. As with many political redistribution schemes, once underway, the system has snowballed into the unsustainable trajectory we see today.
My goal in writing this article is to explain how we got here, describe the present situation from the physician’s vantage point, and outline what must change to restore sanity to American healthcare.
Pre-WWII: A Simpler System
Before the 1930s, most medical care was inexpensive and paid out of pocket. Physicians were small, independent operators. Hospitals were community based, low-tech facilities. Insurance was rare because it wasn’t needed.
A few early prepaid plans existed, including Blue Cross in the 1920s for hospital stays and Blue Shield in the 1930s for physician services. Most Americans remained uninsured because medical expenses were predictable and manageable.
WWII and the Unintended Consequences of Wage Controls
During World War II, the US government froze wages to prevent inflation and stabilize the wartime economy. Employers couldn’t raise salaries to compete for workers, so they turned to fringe benefits that weren’t restricted under wage controls. The biggest was employer-sponsored health insurance. This would become the defining structural feature of American healthcare.
Two major tax decisions locked this model in place. In 1943, the IRS ruled that employer-provided health benefits were not taxable income to employees. In 1954, Congress codified the rule permanently. It became cheaper for employers to provide insurance than to raise wages, and employees had every incentive to get coverage through work. This single tax exemption remains the largest tax expenditure in US history. By the 1960s, most working Americans received health coverage through their employer.
Postwar Medicine: Better, Longer, and More Expensive
After WWII, medicine transformed. New antibiotics, ICUs, complex surgeries, advanced imaging, and longer life expectancy made healthcare far more effective and much more expensive. As costs rose, insurance became essential.
But, because insurance was tied to employment, large groups were left out: the elderly, the unemployed, those in unstable jobs, and low income populations. To patch these gaps, policymakers created Medicare for seniors and Medicaid for low-income individuals. These programs filled critical holes but created a fragmented system with multiple payers operating under different rules.
Insurance was never intended to function as a prepaid debit card for routine care. It was designed to protect against catastrophic, unpredictable expenses. Yet, as employer-based coverage expanded and tax subsidies grew, Americans demanded richer benefits for predictable services. This eroded price sensitivity and accelerated cost inflation.
Higher-Order Consequences: The System Starts to Break
While the employer-based model solved a wartime problem, it created long term structural failures. Coverage became dependent on job stability: Lose your job, lose your insurance.
Employers became the primary healthcare purchasers. Companies like GM spent more on healthcare than on steel.
Medical pricing became opaque. When a third party pays the bill, neither the buyer nor the seller has an incentive to control cost.
Hospitals and insurers became mutually dependent. Both industries grew around the employer based risk pool, focusing on maximizing reimbursement rather than maximizing value.
Innovation raised costs faster than wages. The richer the insurance benefits, the more utilization increased, driving further inflation.
Payers Dictate the Experience, Not Physicians
As costs escalated, insurance carriers transformed into gatekeepers controlling access to care. They inserted themselves into the physician-patient relationship through prior authorizations, network restrictions, reimbursement cuts, bundled billing rules, and administrative hurdles for even simple procedures. This created a culture where access is delayed, not delivered. Physicians spend hours fighting bureaucratic obstacles instead of caring for patients. Patients wait for approvals instead of receiving timely treatment. Insurance companies profit from delay, and the system accepts it.
Hospitals Consolidated and Costs Exploded
Postwar hospital expansion accelerated through federal subsidies, employer-supported insurance dollars, and aggressive consolidation. Hospitals grew into massive financial institutions with vertical integration, academic overhead, and administrative layers that dwarf clinical staffing.
Patients experience the consequences daily. Facility fees for simple outpatient services, opaque pricing, delayed scheduling, out-of-network penalties, specialists stretched thin across expanding health systems, and the system rewards complexity, not efficiency.
Bandaides on a Broken System
As costs soared, insurers attempted to control spending through HMOs, PPOs, utilization management, networks, and prior authorizations. These were bandaides to address the inflation caused by the employer-based model itself. Each added more administrative burden and cost without addressing the root problem.
The Misnomer of All Time: The “Affordable” Care Act
The ACA expanded coverage through marketplaces, subsidies, Medicaid expansion, and mandated coverage of pre-existing conditions. These strategies increased costs and complexity. The employer-based model—the third rail of American healthcare—remained untouched. Administrative layers multiplied, and all of them had to be paid for. The US healthcare system is now one of the largest financial sectors in the world, with administrative costs unmatched by any other developed nation.
A System of Interventions
What we call the American healthcare system is the cumulative result of WWII wage controls, tax incentives that favor employer-based insurance, rapid medical innovation, fragmented political solutions, and deep entanglement between industry and policy. It evolved as a series of improvisations, incentives, and unintended consequences that produced the most administratively-heavy and economically-inefficient healthcare structure in the developed world.
